COMMISSION STAFF WORKING DOCUMENT Country Report Sweden 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Sweden, consumption, economic disparity, economic growth, employment statistics, indebtedness, level of education, macroeconomics, public debt, structural adjustment, tax collection













EUR-Lex - 52015SC0046 - EN











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52015SC0046

COMMISSION STAFF WORKING DOCUMENT Country Report Sweden 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0046 final */









                                                                                                                                                   
Executive summary  1
1.       Scene
setter: economic situation and outlook  3
2.       Imbalances,
risks and adjustment 10
2.1.   Private
indebtedness 11
2.2.   Housing
market 18
2.3.   Banking
sector 26
2.4.   Assessment of
inter-linkages and potential impacts 31
3.       Other structural
issues 38
3.1.   Taxation,
public debt sustainability and fiscal framework  39
3.2.   Labour
market, education and social policies 41
3.3.   Competitiveness,
innovation, infrastructure and environment 50
A.      Overview
Table  57
B.       Standard
Tables 61
LIST OF Tables
1.1.     Key
economic, financial and social indicators 8
1.2.     The MIP
scoreboard   9
2.1.1.  Composite
index of tax incentives for owner-occupied housing  17
2.3.1.  Financial
soundness indicators 27
2.4.1.  Stress test
results: common equity Tier 1 ratio (CET1) 34
2.4.2.  Estimated
maximum impact of 10% decline of house prices 35
2.4.3.  Maximum impact
of 1 pp. increase of interest rates 36
B.1.     Macroeconomic
indicators 61
B.2.     Financial
market indicators 62
B.3.     Taxation
indicators 63
B.4.     Labour
market and social indicators 64
B.5.     Expenditure
on social protection benefits (% of GDP) 66
B.6.     Product
market performance and policy indicators 67
B.7.     Green
growth  68
LIST OF Graphs
1.1.     External
and domestic demand, contributions to growth - Sweden  3
1.2.     Export
market share decomposition  3
1.3.     Dynamism
and Competitiveness of Exports (goods) on top-10 country destinations
(2012-2013)- Sweden  4
1.4.     Current
account balance by component - Sweden  5
1.5.     Decomposition
of real effective exchange rate  5
1.6.     Gross
capital formation by type – Sweden  6
2.1.1.  Debt ratio for
different groups in 2013  11
2.1.2.  Change in
household indebtedness since 2008 and since peak, %   11
2.1.3.  Household debt
growth (1999=100) 12
2.1.4.  Decomposition
of y-o-y changes in debt-to-GDP ratio, quarterly data, %   12
2.1.5.  Estimated
range of potential deleveraging needs, %   13
2.1.6.  Credit supply
and demand deleveraging pressures, 2013  13
2.1.7.  Household debt
and real property price index, (2000=100) 14
2.1.8.  Proportion of
mortgage borrowers who have increased, decreased or kept their debts unchanged
between 2012 and 2013, %   14
2.2.1.  Real house
prices in the Nordic region, Index 2007=100  18
2.2.2.  Average annual
growth rates of real disposable income and real house prices between 2000 and
2014  19
2.2.3.  Price to rent
and price to income  19
2.2.4.  Overvaluation
gap with respect to main supply and demand fundamentals 20
2.2.5.  Interest
burden vs debt per gross disposable income  20
2.2.6.  Real housing
prices, household debt and disposable income growth (2000=100) 21
2.2.7.  Revenues from
property taxes (in % of GDP, 2012) 21
2.2.8.  Real land
price and real house price growth (2007=100) 22
2.2.9.  Rent of newly
built apartments vs existing stock  24
2.2.10.          Change
in the proportion of rental flats in blocks of flats in Greater Stockholm
1990-2012, in thousands 25
2.3.1.  Lending to
private sector 26
2.3.2.  Loans to
deposits, %   27
2.3.3.  Leverage
ratios (%) 28
2.4.1.  Loan-to-value
ratios 31
2.4.2.  Household
expectations of the variable mortgage rate one, two and five years ahead   32
2.4.3.  Household debt
ratio in different income groups (only mortgage borrowers), %   33
2.4.4.  Share of
financial and real assets held by indebted households in different income
groups, 2007, %   33
2.4.5.  Relationship
between debt ratio and consumption growth, 2007-2012, %   34
2.4.6.  Swedish house
price correction in 1990s, 1990=100  35
2.4.7.  Swedish
households' interest expenditure, % of disposable income  36
2.4.8.  Interest rate
increase and share of households with a deficit, %   37
3.2.1.  Labour market 41
3.2.2.  Youth
unemployment rate in EU Member States by educational status, 2013  41
3.2.3.  Number of
asylum seekers coming to Sweden 1995-2014  42
3.2.4.  Employment
rate (20-64) for non-EU born and non-EU nationals compared to total population
in Sweden, 2013  43
3.2.5.  Unemployment
rate (15-64) for non-EU born and non-EU nationals compared to total population
in Sweden, 2013  43
3.2.6.  Deteriorating
trend of education outcomes in Sweden  45
3.2.7.  Lower
secondary teachers' salaries in some EU member states at different points in
their career (2012) 46
3.2.8.  Age
distribution of asylum applications of unaccompanied children in 2014  48
3.3.1.  Employment and
value added growth in market services, 2008-12  51
3.3.2.  Swedish goods
sector: comparative advantage  51
3.3.3.  Overall
efficiency of pre-insolvency framework  52
3.3.4.  Greenhouse gas
emissions and real GDP growth in Sweden  54
3.3.5.  Share of
renewables in gross final energy consumption, 2012 and Europe 2020 target 55
3.3.6.  Share of SOEs
turnover in total, railway 2012  56
3.3.7.  Evolution of
the flagged fleets of some EU Member States, 2004-13 (% change in deadweight
tonnage  56
LIST OF Boxes
1.1.     Economic
surveillance process 8
2.1.1.  Corporate
indebtedness 14
LIST OF Maps
No table of contents
entries found.
In 2014 and early 2015, GDP and
employment growth in Sweden were supported by expanding domestic demand relying on robust consumption and an expanding construction sector,
while Sweden’s export sector is struggling. As external demand gradually
improves, investment and stronger exports will help Sweden's GDP growth to rise
from 1.8% in 2014 to 2.3% in 2015. 
Household consumption grew dynamically supported by low interest rates, growing disposable incomes and an
expansionary fiscal policy in recent years. Government consumption expands due
to higher spending on integration of migrants, education and elderly care. 
Sweden's level of investment is high
compared to its peer countries. Further investments
in research and development and education could help to reverse the declining
R&D investment trend and to boost the long-term competitiveness of the
country. Investments in transport infrastructure to improve connectivity within
and between urban areas could help to alleviate some of the constraints caused
by the housing shortage.
Employment recovered more quickly in
Sweden than in other EU Member States after the financial crisis. The employment rate of 79.8% is already close to pre-crisis levels
and is the highest among EU Member States. Nevertheless, due to the dynamically
rising labour force, unemployment has been stuck around 8% for several years
and is particularly high among low-educated young people. The employment gap
between those born in Sweden and non-EU migrants also remains large, especially
for women. 
This Country Report assesses Sweden's
economy against the background of the Commission's Annual Growth Survey which recommends three main pillars for the EU's economic and
social policy in 2015: investment, structural reforms, and fiscal
responsibility. In line with the Investment Plan for Europe, it also explores
ways to maximise the impact of public resources and unlock private investment.
Finally, it assesses Sweden in the light of the findings of the 2015 Alert
Mechanism Report, in which the Commission found it useful to examine further
the persistence of imbalances or their unwinding. The main findings of the
In-Depth Review contained in this Country Report are:
·       The high level of household indebtedness in Sweden has been
identified as a remaining risk for macroeconomic stability. Household debt, notably in the form of mortgages, remains at very
high levels (roughly 160% of disposable income on average in 2013) and keeps
expanding, with net credit flows outpacing nominal GDP growth. The challenge is
particularly pronounced in metropolitan municipalities and in general
negatively affects the ability of the real economy to withstand shocks. 
·       Unlike in many other EU Member States, house prices have not gone
through any major correction in Sweden. On the
contrary, they keep increasing, partly due to favourable fundamentals such as
higher disposable income, low interest rates, strong demographics etc.
Structural issues also contribute to house price growth in Sweden: the housing
market is characterised by several market inefficiencies and weak competition.
As a result, construction activity has been weak for many years, which has resulted
in a housing shortage. Supply is further held back by an ineffective use of the
existing housing stock due to rigidities on the rental market. However, the
above-mentioned factors cannot alone explain the extent of price increases,
which suggests that levels might be above their fundamental value.
The Country Report also analyses
macroeconomic and structural issues and the main findings are:
·       In the short and medium term, Sweden faces no major risks in terms
of fiscal sustainability. Nevertheless, the budgetary
impact of population ageing, in particular in the area of long-term care, is a
risk element in terms of long-term fiscal sustainability. Swedish taxation is
the fourth highest in the EU with a tax-to-GDP ratio (including social
contributions) of 44.2% in 2012.
·       The Swedish labour market, to a large extent governed by
negotiations between social partners at sectorial level, is characterised by positive labour market outcomes, for instance,
in terms of high employment rate. However, low-educated and low-skilled young
people and non-EU nationals face high unemployment, inter alia in the context
of an overall deterioration of education outcomes. 
·       School education results in Sweden have weakened (for instance Sweden is now performing below both the EU and OECD
averages according to PISA surveys) and equity in education has been declining.
The system of integrating newly arrived migrant pupils shows a number of
shortcomings.
Overall, Sweden has made limited
progress in addressing the 2014 country-specific recommendations.
As regards policies relevant to
macroeconomic imbalances, steps have been taken to improve the efficiency of
the housing market and to stem household indebtedness, such as an increase in the risk weight floor on mortgages and the
forthcoming compulsory amortisation on new mortgage loans. However, no action
has been taken to reduce tax deductibility of mortgage interest or to reform
the rental market. Some elements of the macroeconomic imbalance relevant
recommendations have thus remained unaddressed and overall, limited progress
was made in implementing them.
As regards the recommendations to
address other policy challenges, while this Country Report excludes an
assessment of compliance with the Stability and Growth Pact, it can be noted
that the Swedish government has a continued commitment to fiscal
responsibility. Some progress has also been made to
address challenges linked to the Swedish labour market, in particular regarding
widening the use of work-based learning and apprenticeships, and fully
implementing the youth guarantee.
The Country Report reveals the policy
challenges stemming from the analysis of macroeconomic imbalances:
·       The debt-bias in taxation still gives Swedish households incentives
to take on debt. More specifically, mortgage
interest deductibility and recurrent property taxation can be important drivers
in this context. Sweden has made no progress in these areas, which would
require a carefully sequenced implementation, minimising potential unease on
the housing.
·       Housing market developments are intimately linked to structural
inefficiencies. Further efforts to streamline and
simplify planning and building regulations, support public infrastructure
investments and promote better competition in the construction sector could help
increase new constructions. Reforming the rent setting procedure in order to
allow wider divergence of rent levels could lead to a more effective use of the
existing housing stock. Due to the municipalities' pivotal part in new
constructions, any policy actions should also consider their role and revise
their incentives to support new construction. Addressing the supply side
constraints could smoothen house price dynamics and ease economic and social
constraints.
Other
challenges are:
·       Developing the human capital of the low-skilled could contribute to
higher employment of vulnerable groups and
positively contribute to higher competitiveness. Ensuring that employment
subsidies are adequately targeted is also important. 
·       Municipalities' strengthened responsibility for young people who are
neither in employment, education or training, paves the way for additional
improvements in outreach. A better developed
partnership between the public employment service and various services and
actors at the local level will be a key success factor.
·       Deteriorating school education outcomes risk putting pressure on
Sweden's competitiveness and innovation capacity in the long run. The quality of education resting on multiple pillars, a
well-rounded and comprehensive approach appears important.
Overview
While domestic demand is growing at a
healthy pace thanks to consumption and construction, Sweden’s export sector is
struggling. Consequently, export-oriented industrial
sectors remain weak while service sectors are growing at a strong pace. As
external demand gradually improves, investment and stronger exports will help
Sweden’s GDP growth to rise from an estimated 1.8 % in 2014 to
2.3 % in 2015 and 2.6 % in 2016 (Graph 1.1 below).
 Graph 1.1:     External and domestic demand, contributions to growth - Sweden 
   
 Source:  European Commission 
Expansionary fiscal policy and low
interest rates contributed to the strong domestic demand over recent years. Although fiscal policy is expected to become neutral or slightly
contractionary, household consumption growth will still find support from low
interest rates, growing disposable incomes and steady employment growth in the
coming years. Household saving is projected to have reached a new peak in 2014,
and will only gradually decline in the coming years as economic uncertainties
are waning and unemployment is starting to decrease. Government consumption is
projected to expand at a strong pace due to higher spending on integration of
migrants, education and elderly care.
Trade developments
Despite being one of the most
competitive economies in the EU, Sweden has been continuously loosing export
market shares since 2008. The cumulative export
market shares loss of 17% between 2008 and 2013 is higher than of traditional
peer countries', such as Germany's or the Netherlands' decline (which is
approximately 9.2%), but comparable to Denmark, while outperforming Finland,
which suffered almost 30% loss during the same period. The loss in Swedish
export market share is concentrated in goods export, while services show
moderate gains since 2010 as shown on Graph 1.2 below. 
 Graph 1.2:     Export market share decomposition 
   
 Source:  European Commission 
Sluggish export performance can be
attributed to several factors. As regards
geographical specialisation, Sweden's export performance has been negatively
affected by the deteriorating market dynamism in several of its main trade
destinations (such as the Netherlands or Finland) resulting in lower import
growth in those countries. Swedish export is to a large extent dependant on EU
countries: almost 70% of the Swedish export goes these countries, which have been
suffering from sluggish growth. The Swedish export sector could not gain
additional impetus from more dynamic Asian or South-American markets in
comparison with, for instance, Germany.
Furthermore, machinery, chemicals and
transport equipment represent a large fraction of Swedish exports, which were
the least dynamic sectors between 2000 and 2013. As
investments growth was weak in Sweden's main trading partners, demand for
Swedish exports remained subdued. Looking at both the dynamism of destination
markets and of product basket, Sweden - together with Finland and the
Netherlands - had a less favourable export composition in 2013 compared with
the other EU countries. 
Finally, Sweden faced deteriorating
competitiveness in most of its main trading partners. This witness both price competitiveness (a typically successful
strategy when competing in markets of standardised goods or in lower-income
markets) and non-price competitiveness (important when competing in
higher-income destination countries or in differentiated products). Graph 1.3 below provides a summary in this
respect. Market dynamism is a proxy for Sweden's destination markets that
compares their import growth rates with world total import growth.
Competitiveness indicator compares the growth of Sweden's exports with the
growth of total world exports to these markets. The size of the bubbles
indicate the countries' weight from Swedish export goods.
 Graph 1.3:     Dynamism and Competitiveness of Exports (goods) on top-10 country destinations (2012-2013)- Sweden 
   
 Source: European Commission,  Comtrade 
The Russian-Ukrainian crisis had so far
limited direct impact on Swedish trade and growth as the direct trade exposure
towards these countries is small. Russia constitutes less than 1.5% of Sweden’s
goods exports (most importantly automobiles, telecommunications equipment and
chemicals) and approximately 1% of its services exports. While Russia
constitutes 5% of Swedish imports, these are almost exclusively raw materials,
in particular crude oil and coal (and there are no imports of natural
gas) ([1]). 
Sweden's current account surplus
gradually declined from its peak of 9.4% of GDP in 2008 to 5.8% in 2014. As demonstrated in Graph 1.4 below, while the contribution of
services and net incomes to the current account balance have been slightly
increasing, the trade surplus from goods export is diminishing resulting in
declining current account surplus. As Swedish households' record high savings
rate decrease and investments pick up, the adjustment of the current account
surplus will likely continue. 
 Graph 1.4:     Current account balance by component - Sweden 
   
 Source:  European Commission 
Sweden displays a moderately negative
net international investment position, which, however, has been improving in
recent years. At ‑6.4% of GDP in 2013, the
Swedish net international investment position is well within the MIP scoreboard
threshold of -35% of GDP and thus presents no sustainability concerns. High
current account surplus will contribute to slowly improve the net international
investment position. Furthermore, if foreign direct investments are valued at
market terms and not at book value, the NIIP has been in positive territory
already since 2006([2]).
Swedish cost developments against those
of its trading partners do not indicate major challenges in terms of
competitiveness. While the real effective exchange
rate has appreciated between 2010 and 2013, as shown in Graph 1.5 below, the weakening Swedish krona since
2014 could positively impact export performance. Unit labour costs have been
growing in line with Sweden's main trading partners, but consumer price
inflation, measured by the Harmonised Index of Consumer Prices has been growing
more slowly (see also Section 2.3).
 Graph 1.5:     Decomposition of real effective exchange rate 
   
 Source:  European Commission 
Investments 
Overall investment levels in Sweden are
higher than in comparable EU economies (such as
Germany, the Netherlands or Denmark). Investments have been weak in industry,
but service sector and public sector investments have been rising. High public
sector investment is driven by a major need for improvements in both local and
central government infrastructure including housing. Residential housing
investment has been particularly low for a long time despite dynamically rising
house prices, but in light of the strong demographic developments, rising
urbanisation and a housing shortage, there are major investment needs in the
country. For instance, investments in transport infrastructure to improve
connectivity within and between urban areas could help to alleviate some of the
constraints caused by the housing shortage. Rising house prices together with
supply side constraints hindering new constructions are considered as a
macro-economic imbalance of the country and analysed in detail in Section 2.2. 
As a small, open economy where export
constitutes to approximately 50% of GDP, external market development strongly affect
Swedish manufacturing investments. Weak Swedish
export market performance was thus mirrored in sluggish industrial production
and weak manufacturing investments. As a result, Swedish productivity growth
also struggled to recover to pre-crisis levels, because the expanding service
sector increased the share of the low-productivity jobs at the same time that
manufacturing investments and jobs were shrinking. Besides the challenges
related to Swedish export market destinations, product diversification coupled
with deteriorating competitiveness discussed above, improving local business
environment could also positively impact export performance and thus indirectly
manufacturing investments. Compared with its main peer countries such as
Germany or Denmark, Swedish SMEs fall behind in level of internationalisation
in the form of foreign trade. should increase The proportion of high value
added exports goods and services of Swedish companies could also increase. The
Swedish government announced to launch a new export strategy in order to
address these challenges.
Following a contraction of 0.4% in 2013,
Swedish investments have increased at a rate of 4.7% in 2014. The acceleration was mainly driven by investments in housing,
expanding at the range of 20%. While growth of housing investments is expected
to slow down, other investments will catch up based on stronger external
demand. Nevertheless, low capacity utilisation and fragile external
developments will continue to mute manufacturing investments.
 Graph 1.6:     Gross capital formation by type – Sweden 
 Source: European Commission 
Employment 
Despite a relatively modest economic
activity, employment growth has been particularly strong in recent years. Employment recovered better in Sweden following the financial
crisis than in other EU countries. The current employment rate is already close
to pre-crisis levels and is the highest among EU countries. Nevertheless, due
to the dynamically rising labour force, unemployment has been stuck around 8%
for several years. The ongoing challenge for the Swedish labour market is to
integrate the growing number of economically and socially vulnerable groups
(see also Section 2.2). 
Inflation
Inflation in Sweden has been around 0%
since the end of 2012 because of low price
increases for energy and services and because import prices have been weak as a
result of subdued international economic activity. In February 2015, the
Swedish central bank cut its repo rate from 0% to -0.1% and announced the
purchase of government bonds. In spite of growing consumption and employment, a
negative output gap and a high unemployment rate suggest ample spare capacity
in the economy, which would suppress price increases. Falling oil prices are
also pushing inflation down. Policy discussions continue to take place in
Sweden on the use and impact of further non-conventional monetary measures to
fight deflationary pressures.
Public finances
In December 2014, the opposition
parties’ budget was voted by the Swedish Parliament, causing a political crisis
in the country. However, since both the opposition
and the government budgets contain only fully-funded measures in line with the
‘krona for krona’ principle, this will not have a significant impact on the
government balance. After the nadir in 2014, public finances are expected to
improve, and the deficit to reduce to 1.6% in 2015 and 1.0% in 2016. Negative
risks to the budget could come from a potentially worse macroeconomic outlook and
higher costs for integrating the large inflow of migrants. 
Domestic debt
Public debt stands at a relatively low
level of around 41% of GDP in 2014, below the 60%
of GDP reference value stipulated in the Treaty (see also Section 2.1). As
government budget deficit is expected to gradually improve, public debt will
gradually decline in the coming years. 
Consolidated private indebtedness
remains at 201% far above the MIP threshold of 133% of GDP. The main concern is household debt, which is still dynamically
increasing driven by favourable credit conditions and house price increases,
and for which reason it is analysed in detail in Section 2.2. 
 Table 1.1:       Key economic, financial and social indicators 
 1 Domestic banking groups and stand-alone banks. 2 Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches. 3 Real effective exchange rate (*) Indicates BPM5 and/or ESA95 Source: European Commission, ECB 
 Table 1.2:       The MIP scoreboard 
 Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, the second threshold concerns non-Euro Area Member States. (1) Figures in italic are according to the old standards (ESA95/BPM5). (2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). Source: European Commission 
 Box 1.1: Economic surveillance process The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors. In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation no. 1176/2011 — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published on November 2014. Based on the 2014 IDR for Sweden published in March 2014, the Commission concluded that Sweden was experiencing macroeconomic imbalances monitoring and policy action, in particular, developments in the areas of household debt, linked to the high levels of mortgage debt and structural characteristics of the housing market, as well as unfavourable developments in export market shares. This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Sweden concerned public finances, private indebtedness, housing market and labour market. 
Households' indebtedness developments 
Households' debt in Sweden is high and
growing faster than in the rest of the EU
The economy-wide debt to disposable
income ratio was 160% in Sweden in 2013. However, for indebted individuals the
ratio is substantially higher. A recent study by
the Riksbank ([3]) shows that
the debt ratio reaches 313% for households that have a mortgage and even 370%
for new mortgage borrowers ([4]) as reflected in Graph 2.1.1. 
 Graph 2.1.1:   Debt ratio for different groups in 2013 
 Source:  Riksbank 
Moreover, for households with mortgages the
debt ratio averages over 400% in the three metropolitan municipalities
(Stockholm, Göteborg, Malmö).
Households' indebtedness is still
growing in Sweden while some deleveraging has already taken place in peer
countries, i.e. the debt to GDP ratio has come
down. While most EU Member States' households reached a peak in indebtedness in
the post-2008 period - for instance, Denmark and the UK peaked in 2009 and the
Netherlands in 2010 - household debt in Sweden, as in Finland, is still growing
(Graph 2.1.2). 
 Graph 2.1.2:   Change in household indebtedness since 2008 and since peak, % 
 Source: European Commission 
Moreover, household debt has been
growing faster in Sweden than in the rest of the EU
especially since 2007 (Graph 2.1.3).
 Graph 2.1.3:   Household debt growth (1999=100) 
 * Excluding Luxembourg and Malta Source: European Commission 
Households' debt to GDP is still
increasing mainly driven by net credit flows
outpacing nominal GDP growth (Graph 2.1.4). 
 Graph 2.1.4:   Decomposition of y-o-y changes in debt-to-GDP ratio, quarterly data, % 
 Source: European Commission 
Comparative analysis puts Sweden among
the Member States with the highest need for deleveraging
Two methods are used for estimating the
deleveraging needs: one is based on a Commission
analysis of debt sustainability ([5]), the other on an analysis by the IMF ([6]) of historical boom and bust episodes. The first method defines a
country-specific sustainable level of debt by inferring debt that is consistent
with households' assets corrected for valuation effects (marked with a grey dot
in Graph 2.1.5). The second method is based on the
"typical" extent of deleveraging in past episodes, and is a function
of the preceding debt increase, this is the historic method (marked with a
yellow square). The midpoint line shows the average of the results provided by
these methods.
For Sweden deleveraging needs for
households may be above 20% of GDP ([7]). This is also the case for Denmark and
Greece. However, the implications of these deleveraging needs - in terms of
pace, of mode of deleveraging and of the overall implications for economic
activity- will largely depend on the state of credit demand and supply, which
reflect the strength of the economy as well as the state of the financial
sector (for the latter, see Section 2.3). 
 Graph 2.1.5:   Estimated range of potential deleveraging needs, % 
 Source: European Commission, IMF 
In Sweden, credit demand and supply
conditions are benign and have even improved since 2009. Graph 2.1.6 combines two composite indicators
to reflect the two sides of credit market conditions. For Sweden both supply
and demand sides conditions improved since 2009 suggesting a potentially smooth
and gradual adjustment of household debt. It could be mostly driven by nominal
growth of the economy in the medium term if appropriate policy measures are
taken to contain the growth pace of net credit flows.
 Graph 2.1.6:   Credit supply and demand deleveraging pressures, 2013 
 Source: European Commission 
Debt-containing measures and still effective
debt-drivers
Incentives to take on debt are still
strong
Measures taken by the Swedish
authorities have not been sufficient so far to curb the progression of
household debt to GDP. Even though net credit flows
moderated since Q4 2010, they still amounted to 3.8% in 2013 and still outpace
nominal GDP growth driving household debt to GDP further upward. 
Several factors lie behind the
continuous increase of household debt: 
The continuous increase in housing
prices -fuelled by housing supply constraints -
over the past two decades has led to larger mortgage loans (Graph 2.1.7). Housing price developments have been
even sharper for tenant-owned apartments (see Section 2.2). 
 Graph 2.1.7:   Household debt and real property price index, (2000=100) 
 Source: Riksbank 
Generous tax incentives on mortgage
interest payments create an incentive towards
home-ownership via indebtedness.
Low interest rates and benign credit
conditions make higher loan-to-value mortgages more
affordable. Moreover, the possibility to take unsecured loans on top of the 85%
loan-to-value cap increases the potential amounts borrowed. 
·       A weak amortisation culture translating
into limited amortisation and long actual repayment periods favours a growing
stock of debt. As illustrated on Graph 2.1.8 only 38% of mortgage borrowers
amortise fully their mortgage loan in less than 50 years, 23% amortise over a
longer period and 39% are not amortising.
 Graph 2.1.8:   Proportion of mortgage borrowers who have increased, decreased or kept their debts unchanged between 2012 and 2013, % 
 Source: Riksbank 
Policy responses so far have mainly
focused on macro-prudential measures
Several measures, mainly
macro-prudential, have been adopted to contain the demand for credit, promote
amortisation and strengthen banks' resilience. On
the demand side for credit, an 85% loan-to-value cap was introduced by the
Financial Supervisory Authority in 2010. Moreover, several measures have been
introduced to promote a stronger amortisation culture. In March 2014, the
Swedish Bankers' Association recommended that new mortgage loans be amortised
down to 70% (instead of previously 75%) over 10 to 15 years. In November 2014,
the Financial Supervisory Authority announced a forthcoming regulation: New
loans will have to be repaid in two steps; mortgage holders with a
loan-to-value ratio above 70% will repay at least 2% of their original loan
each year. Once at 70% or below, households will repay at least 1% each year
until the loan-to-value ratio reaches 50%. The regulation is still forthcoming
and the definitions of “new loans” and of “temporary exceptions” (e.g. linked
to sickness and unemployment) are to be determined.
Furthermore, individual amortisation
plans are being applied by banks since July 2014 following an initiative by the
Financial Supervisory Authority and the Swedish Bankers' Association. A discussion between the lender and the borrower about amortisation
should take place before the final amortisation plan is proposed. Also, this
plan should be in the best long-term interest of the customer. The objective is
to allow households to make a decision about amortisation by having banks
clearly showing how amortisation affects a household's finances in the
long-run. This measure together with the public debate on amortisation seems to
have incentivised new borrowers to take on an amortisation plan ([8]). However, for the moment, this plan can be interrupted and
household can decide to repay interests only.
A new government regulation on fairer
rules for repayment of mortgages entered into force in July 2014. This regulation aims at facilitating the possibility for the
consumer to repay one's fixed rate mortgage or to switch banks, thus increasing
competition in the market. It has two main components. First, the government
proposes a new model for the calculation of interest rate compensation for the
banks, corresponding to the actual costs for the bank. Second, the regulation
limits the creditors' right to ask for the repayment of a mortgage when the
value of the security for the loan has decreased as a result of a general
downturn in the housing market. From a financial stability perspective, this
measure restricts banks' option to transfer the risk of a general market fall
to the household sector. This recent measure doesn't seem to have incentivised
more repayments so far possibly because households might not be aware of it. 
Further measures have been implemented
regarding banks' resilience (Section 2.3) and housing supply (Section 2.2). 
No reform has been undertaken in Sweden
to limit the generous tax deductibility on mortgage interest payment or
increase recurrent property taxation to reduce households' incentives to take
on debt. 
  Box 2.1.1: Corporate indebtedness Consolidated corporate debt is slightly decreasing compared to 2012 and reached a level of 125% of GDP in 2013. Since the peak in 2009, the leverage ratio fell by nearly 20% of GDP. This development is mainly driven by negative credit flows due to relatively weak economic growth. Considering the contribution of different underlying variables to deleveraging, 'other changes' contributed increasingly positively to the debt-to-GDP level in recent quarters including e.g. valuation changes due to foreign currency denominations, debt write-downs or other. The restructuring of firms' financing from abroad might have contributed to the deleveraging of firms. Restricted tax deductibility for intra-group interest expenses has reduced the attractiveness of intra-group loans while lower corporate tax rates should support a favourable business environment. The new tax rules together with a reduction of the corporate income tax from 26.3 to 22% in 2013 showed considerable effect on intra-company loans as the annual growth rate of these loans plummeted by 20% in 2013. Sweden's corporate marginal tax rate of 22% is now slightly above EU average (21.3%) and lower than the tax rate in comparable countries. Graph 1:        Right picture: Contribution to deleveraging, Left picture: Inter-company loans 
 Source: European Commission, Statistics Sweden 
Non-financial corporations'
  balance-sheet indicators are healthy and interest payments are decreasing due
  to the low interest rate environment. Gross
  saving as a per cent of gross value added is largely positive (average of
  23.2%), indicating that profits are sufficiently high to avoid taking on
  liabilities. Gross debt-to-equity ratio is decreasing and reached 59% at the
  beginning 2014. Debt-to-financial-asset ratio is stable and slightly
  decreasing in the last two years ([1]).
  
Notwithstanding healthy balance sheets, some studies suggest the
  need for a further deleveraging (of a magnitude that can be accomplished by
  passive deleveraging). The analysis takes
  different deleveraging indicators into account as well as different time
  periods (2). This range of
  deleveraging values should only be taken as an indication. Cross-border
  lending might overstate the deleveraging need. Additionally, favourable
  credit demand and supply conditions in Sweden are expected to support a
  smooth "passive" deleveraging path where the debt-to-GDP ratio decreases
  while positive nominal credit flows are outpaced by nominal GDP growth.            
([1])
  The debt-servicing ability of the corporate sector has improved with the low
  level of interest rates and the favourable economic predictions. This is
  shown by a declining default rate.
(2)The methodology has been
  described in the Quarterly Report on the euro area 4, December 2014.
This contrasts with several Member
States where taxation reforms concerning mortgage interest deductibility have
been undertaken to curb households' demand for mortgage loans. For instance, Spain and Ireland removed interest relief entirely
for new mortgages from 2013, while Denmark, Finland and the Netherlands are
reducing it gradually ([9]). The UK is
also an example of a gradual and complete phase-out of the tax subsidy. These
reforms have proven effective in reducing tax incentives to home-ownership via
debt. As demonstrated in Table 2.1.1, after completely phasing out mortgage
interest deductibility, the UK scores as "low" on tax incentives.
Denmark went from "high" in 2011 to "medium" in 2013 after
reducing the value of the deduction on mortgage interest payments. Sweden still
scores high on tax incentives due to a very high score on mortgage interest
deductibility.
 Table 2.1.1:     Composite index of tax incentives for owner-occupied housing 
 Source: European Commission calculations 
To conclude, household debt in Sweden is
high and still growing leading to households' deleveraging needs estimated at
20% of GDP. Rising housing prices, substantial tax
subsidies, a weak amortisation culture and historically low level of interest
rates are fuelling the rise in indebtedness. Even if households' assets are
high at aggregate level and disposable incomes have grown over the past years,
the household sector in Sweden is more vulnerable than before as described in
Section 2.4. Sweden currently benefits from benign credit market conditions
which indicate that with appropriate policy measures, Swedish households could
engage in a passive deleveraging mode. The Financial Supervisory Authority's
announcement of a regulation to push amortisation down to 50% on new mortgage
loans is a significant step to re-establish an amortisation culture. However,
the debt-bias in taxation, particularly the tax deductibility of mortgage
interests, has not been tackled so far.
Housing market developments
Rebounding Swedish house prices 
Swedish house prices grow again strongly
since mid-2013. While real house prices grew by
1.9% in 2012 and 2.8% in 2013, they accelerated to 7.4% in 2014. Such dynamic
growth rates were last observed between the period of 1997 and 2007, when real
house prices grew at a yearly average of 8% and real house prices doubled
during this ten year period. 
On the EU level, house prices have been
declining since 2007. Sweden, however, is characterised by growing house prices
over the same period, as shown in Graph 2.2.1 below. Among countries comparable to
Sweden, Denmark and the Netherlands have gone through steep adjustments, with
real house prices in 2014 close to 25% lower than in 2007. In Finland, house
prices have remained broadly stable during this period. By contrast, Sweden is
among the small group of EU countries, where house prices have not gone through
a major correction, have not reached their peak yet and also show no signs of
possible correction in the near term.
 Graph 2.2.1:   Real house prices in the Nordic region, Index 2007=100 
   
 Source: OECD 
After historically low levels in 2013,
preliminary figures show that housing investment rebounded sharply in 2014 by
27 %, or 38 500 units. The construction
of new housing could stay around this level in the coming years ([10]). Nevertheless, even with this surge, Swedish investment in housing
stays below the level of its peer countries or the EU average as percentage of
GDP. Despite steadily growing demand for housing and rising house prices in
Sweden, investment to new housing has been subdued now for a prolonged time
now. Between 2000 and 2014, housing investment amounted to an average of 3.4%
of GDP in Sweden, lower than in Finland or Denmark where these values reached
6% and 4.9% respectively, but comparable to the UK. 
House price developments
Indicators point to overvaluation 
Previous in-depth reviews have indicated
that Swedish house prices appear to be above their fundamental values. They also concluded that favourable fundamentals cannot fully
explain the situation; other factors appear to contribute to elevated house
prices. Real house prices have been growing at a higher pace than real
disposable incomes similarly to the UK, but contrary to other European peer
countries, as demonstrated in Graph 2.2.2 below.
 Graph 2.2.2:   Average annual growth rates of real disposable income and real house prices between 2000 and 2014 
   
 Source: OECD 
House price increases have been
particularly large in the urban areas of Sweden
driven by strong urbanisation trends and constraining housing supply factors.
Traditional indicators show house prices
above long-term average levels. According to price
to income (affordability) and price to rent (dividend) ratios Sweden's house
prices point to an overvaluation territory of 25-40% compared to 15-30% of last
year (see Graph 2.2.3 below). Even if such calculations have
to be taken with caution, they corroborate the main trends: house prices are
increasing with reinvigorated strength since mid-2013 from the already high
levels.
 Graph 2.2.3:   Price to rent and price to income 
   
 Source: European Commission, OECD, ECB, BIS and European Commission calculations 
Econometric models also suggest that
house price cycles in Sweden cannot be explained only by fundamental factors. Swedish house price have not gone through a bust period comparable
to those observed during past cycles, as depicted on Graph 2.2.4 below. Rather they possibly entered
into another boom period starting from 2012 indicating a growing potential
overvaluation with respect to the main supply and demand fundamentals. Econometric
models suggest that even small changes in the underlying drivers of the house
prices (for instance when the interest rate is set too low or mortgage tax
deductions too high) could have strong and sudden implications on stability.
 Graph 2.2.4:   Overvaluation gap with respect to main supply and demand fundamentals 
   
 (1) Data for 2014 is provisional Source: European Commission calculations 
Demand side drivers
Strong demand side incentives remain
Swedish house prices are driven by a
strong structural demand: Sweden has experienced a
prolonged period of robust disposable incomes growth and the population of the
country is growing dynamically also due to the high number of immigrants
arriving (section 3.2). The fact that inhabitants per dwelling has been
slightly increasing since 2009 is mitigating immanent demand ([11]). 
Credit incentives have been particularly
favourable. Low inflation is translated into
decreasing mortgage loan rates, which allow households to take higher loans
while keeping their monthly payments at the same or decreasing level. The high
share of variable mortgage is translating lower interest rates to lower monthly
payments expanding households' perceived ability to borrow. As a result,
although private indebtedness compared to disposable income has been growing
steadily, the interest burden of households shows a declining trend (Graph 2.2.5 below). 
 Graph 2.2.5:   Interest burden vs debt per gross disposable income 
   
 Source: European Commission 
Favourable credit conditions have been
magnified by the availability of amortisation-free mortgage loans. The average actual repayment period could be even more than 140
years ([12]). These
types of loans started to increase substantially in Sweden from 2007 and have
become dominant on the Swedish mortgage market ([13]). The availability of these loans allows households to
significantly expand their borrowing capabilities in particular with low
interest rates([14]).Graph 2.2.6 below shows that house prices and
private indebtedness have been growing in tandem until 2007. After 2007,
although real house price growth moderated, private indebtedness grew at a
higher pace, inter alia, on account of favourable mortgage conditions.
Incentives for risky debt-taking in Sweden are one of the highest among EU
countries, due not least to the high proportion of non-amortised loans and
loans with variable interest rates. 
 Graph 2.2.6:   Real housing prices, household debt and disposable income growth (2000=100) 
   
 Source: European Commission, Statistics Sweden, OECD 
The current taxation system in Sweden
tends to push up house prices. Sweden (together
with the Netherlands) applies the highest incentives in the tax system for home
ownership. Taxation of properties in Sweden is below the EU average, producing
revenues equivalent to 1% of GDP in 2012 as shown in Graph 2.2.7. In addition, the most generous tax
subsidies to mortgage interest in the EU are recorded in the Netherlands,
Sweden and Denmark, which further incentivise household to take debts ([15]). While most countries made efforts to reduce tax incentives and to
apply more neutral tax treatment to home ownership (also due to strong fiscal
consolidation needs), these incentives have been unchanged in Sweden. 
 Graph 2.2.7:   Revenues from property taxes (in % of GDP, 2012) 
   
 Source: European Commission 
Supply side drivers
Supply sides constraints hamper new
constructions and effective use of the existing housing stock
Structural issues also contribute to
house price growth in Sweden: the housing market is characterised by several
market inefficiencies on the supply side. As a
result, construction activity has been suppressed for many years and resulted
in a widespread housing shortage all across Sweden. The housing shortage of
between 90 000 and 160 000 thousand dwellings could exist currently
in Sweden. At least the construction of 40-50 000 new apartments would be
necessary to gradually eliminate this shortage on medium term ([16]), which would not be reached if the current supply side constraints
remain in place. Supply is further suppressed by ineffective use of the
existing housing stock due to rigidities on the rental market. 
Regulation
Municipalities have a central role in
supporting new constructions: they have the
planning monopoly, plan and finance public infrastructure projects and own high
proportion of land eligible for construction. Nevertheless, municipalities do
not have sufficient (financial) incentives to support construction activities.
Tax revenues increase, if at all, only moderately and in the mid-term, while
increased residential construction will entail public infrastructure
investments to be financed by them. 
Municipalities, having the planning
monopoly, often impose different local standards and requirements which
fragment the market. Such fragmentation reduces
efficiency, increases building costs and raises uncertainty for construction
companies. 
Sweden's residential investment market
is characterised by long and complex planning and zoning process that
negatively impact supply responsiveness. Swedish
authorities' made some improvements to streamline and simplify planning
regulation in recent years. As a result the amount of time needed for approval
of new construction has been reduced to 5-6 years from 8-10 years, but is still
long compared to the 3 years average of, for instance, Germany. 
Public infrastructure projects can
positively impact housing supply in the medium term. Investment in road, railways or metro line facilitates commuting to
main urban areas. In Sweden, the County Administrative Boards are responsible
to draw up and adopt a plan for regional transport infrastructure development. 
A good example is the plan to extend metro lines in Stockholm which could
involve the construction of 78 000 additional homes until 2030.
Nevertheless, municipalities enjoy relative independence in their public
transport strategy including the funding. Considering wider regional perspective
across municipalities would also allow to better incorporate housing aspects
when designing infrastructure projects. 
Municipalities also retain extensive
ownership of the land: across the country roughly
60-70% of all housing starts takes place on municipal land that has been
transferred to construction companies. In this context, the Swedish Competition
Authority has found that the land allotment procedures are often inefficient
and non-transparent in Sweden. Since the value of the land is increasing at a
higher pace than the value of new housing (as shown in Graph 2.2.8), large construction companies can
"wait-and-see" by initiating only limited new constructions and
rather capitalising on rising land prices ([17]). 
 Graph 2.2.8:   Real land price and real house price growth (2007=100) 
   
 Source: Statistics Sweden 
Once building permits have been granted,
municipalities do not have leverage on real estate developers to start
constructions ([18]).
The Planning and Building Act was
modified in 2014 to simplify the planning permission process in order to
increase supply of housing. Effective as of July
2014, house owners are allowed to carry out certain modifications and additions
to their property without having to acquire a building permit from the
municipality. In principle, these are the construction of ancillary buildings
(such as garages and storage), as well as small dwellings of a total of 25 m2.
These buildings are popularly known as “Attefall houses”, after the
previous Minister for Public Administration and Housing. It is too early to
assess whether the measure is indeed playing a real role in addressing the
housing shortage. Nevertheless, an evaluation of the first few months of
implementation in the three most populated urban municipalities of Stockholm,
Gothenburg and Malmö suggests that the uptake has been slow, at least in the
first period: most notifications in these areas (almost 60%) concern the
extension of existing houses, while Attefall houses account for less than 6%.
Competition
The Swedish construction sector is
characterised by weak competition. The issue has
repeatedly been addressed by the Swedish Competition Authority, which has
identified challenges both regarding the construction of buildings as well as
infrastructure such as roads, bridges, tunnels etc. While foreign companies are
typically competing in infrastructure projects, housing constructions tenders
are typically left to domestic companies. Entry barriers on the market are high
deriving among other factors from the extensive ownership of land, exclusive
contacts with local authorities, complex and diverging building requirements
across the country. The lengthy and cumbersome planning and zoning procedures
also mean that companies need to be knowledgeable of the local conditions and
understand how to navigate the municipal planning monopoly([19]). 
Small and medium-sized enterprises
(SMEs) in the construction sector face difficulties to access finance, which can be a large constraint in terms of launching new
projects, even such ones that the firms themselves consider relatively low-risk
and into which they are willing to invest their own capital ([20]). 
The construction material sector is
operating in a heavily regulated environment, due
to various standards and norms and the need for very precise qualities as
regards for instance durability, size, compatibility with other products etc.
Both the production and the distribution of construction materials are in
general characterised by large economies of scale. As a result, the
construction sector is dominated by four large, vertically integrated
companies, whereof the three biggest account for half of the turnover in the industry.
These four companies also produce important input such as concrete and asphalt,
giving them a competitive advantage over smaller and/or foreign companies that
still largely face difficulties penetrating the market. Recently, there are
signs that foreign actors are becoming more active in large-scale
infrastructure projects, while their involvement still remains limited as
regards housing and construction material.
The Swedish government decided in 2014
to commission a public inquiry on how to promote competitions.
The results of the inquiry are due to be published in October 2015.
Rental market
The Swedish rental market is
characterised by growing structural imbalances, in particular, in dynamically
growing urban areas. Therefore it does not seem to
fulfil its role in alleviating house price pressure or support mobility needs.
Ineffectiveness can be witnessed in the long waiting queues and low turnover of
rental units, a developing black market (for instance, sub-letting without the
permission of the landlord and at rent levels higher than those of equivalent
rental units or trade with rental contracts), suppressed construction of rental
units and increased rate of transformation of existing rental apartments to
owner-occupied dwellings, in particular in the main urban areas ([21]). Sub-optimal use of the existing housing stock, in particular on
the rental market, is one of the main reasons for the housing shortage in
Sweden resulting in significant welfare loss.
Market inefficiencies are primarily
attributed to the high level of rent control.
Sweden is characterised by the highest levels of rent control among EU Member
States ([22]). Rent
levels are negotiated between the Swedish Union of Tenants (Hyresgästföreningen)
and the housing companies. Rental prices are based on a rent valuation model
based on a set of characteristics defined as the so-called 'utility value' of
any given dwelling. These characteristics include factors such as the standard,
services offered and the condition of the dwelling, but location is only taken
into account to a very limited extent. 
The current rent control, hence, does
not allow more differentiated rental prices in the most attractive areas. As a result a significant gap has opened up between actual rental
prices and market prices in urban areas. The difference between those prices is
apparent if rents on the existing stock are compared with newly constructed
rental apartments (in which case rent levels can be set outside the utility
value system for the first 15 years). As depicted in Graph 2.2.9, the rent for newly built apartments
is considerably higher than for the existing stock.
The growing difference between actual
and market rents triggers excessive demand for rental units and creates a
lock-in effect. Existing tenants would not want to
give up their favourable conditions for renting the apartment below market
prices while new entrants cannot access rental apartments. Students, young and
low-income households cannot access cheap, entry-level housing thereby
negatively affecting labour mobility, as well as having important social
implications.
 Graph 2.2.9:   Rent of newly built apartments vs existing stock 
   
 Source: Statistics Sweden 
Divergence between actual and market
rents also incentivises conversion of rental units
to owner occupied dwellings. As a result the numbers of rental units have
decreased by almost 20% in Stockholm between 1997 and 2012, mainly due to the
high conversion of existing rental dwellings as shown on Graph 2.2.10. By contrast, in areas where the gap
between existing rental price and market prices have not opened so widely, the
number of rental units have even increased and the incentives for conversions
have been limited (for instance in Uppsala or in Örebro). 
The insufficient supply on the rental
market creates a pressure on other type of housing;
most notably on tenant-owned apartments (which are the closest substitute in
urban areas) further intensifying their price increase. Inefficient use of the
existing rental units also contribute to the supply side constraints of housing
and could result in significant welfare loss primarily in the urban areas and
an undersupply of 40 000 rental units has been accumulated in the country
- out of which 27 000 in Stockholm([23]).
 Graph 2.2.10: Change in the proportion of rental flats in blocks of flats in Greater Stockholm 1990-2012, in thousands 
   
 Source: Boverket, Statistics Sweden 
Subletting rental units or tenant-owned
apartments remains constrained. Such a possibility
is subject to the agreement of the building association owning the apartment,
rental prices cannot be set freely and remain uncertain due to possible
litigations. Reforming the rent price setting procedure in order to allow wider
divergence of rental prices, for instance by considering location and rental
prices for private and/or newly built apartment rental prices would allow to
close somewhat the gap between market prices and existing rental prices in
urban areas and/or could allow cheaper rental prices in less attractive areas.
Further challenges will emerge to
address the housing needs of the big number of migrants in Sweden. Elevated house prices, non-availability of social housing, high
requirements (for example regarding income levels) or unavailability of rental
apartments pose serious challenge for these people to integrate in the labour
market.
No new policy action has been taken in
2014 to tackle these shortcomings. The Swedish
authorities aim to evaluate first the impact of already implemented policy
measures on the rental market. 
Housing market concerns are closely
interlinked and reinforce each other. For instance,
unavailability of rental dwellings forces people to buy apartments, thereby
fuelling house price growth. Inefficient use of existing dwellings supresses
existing housing supply thereby increasing pressure on new construction and
rental market. Lack of infrastructure investments would put further upwards
price pressure on house prices in core urban areas, which could further
incentivise the conversion of rental dwellings. Therefore a coordinated policy
approach could tackle these inefficiencies.
The increase in private indebtedness is
fuelled by bank credit. Lending for house purchases
in Sweden is growing at a relatively high rate, despite a slow-down after 2010
(Graph 2.3.1). Mortgages are an ever growing part
of banks' assets. The banking sector is not only contributing to the growth of
household debt, but it is also exposed to related risks such as credit risk and
funding risk, which are analysed in this section. Swedish banks might bear
negative consequences should those risks materialise. More importantly, they
could act as a transmission channel amplifying the impact of developments in
the housing market on the economy. Hence, banks need robust capital and
liquidity buffers to absorb such potential shocks. 
Recent developments and challenges
Sweden has a large and internationally
exposed banking sector. At the end of 2013, total
domestic and foreign assets accounted for 400% of GDP. Swedish assets
constitute more than half of the total balance sheet. The domestic exposures
have been increasing in recent years on the back of credit expansion. In 2014,
the banks' foreign business has also picked up. The banking sector is dominated
by four large groups: Nordea, Svenska Handelsbanken, SEB and Swedbank, which
together have 83% market share in terms of total assets.
Swedish banking groups have systemic
importance in the Nordic-Baltic region. Total foreign
exposure of banks amounted to 168% of GDP in mid-2014, up from 160% in
mid-2013. It was mainly directed towards Denmark, Finland, Germany, the US and
the UK. Exposure to the Baltic countries corresponded to about 10% of GDP.
While the Baltic business holds a relatively minor share on Swedish banks'
balance sheets, the Swedish banks constitute the pillars of the Estonian,
Latvian and Lithuanian financial sectors. In the wake of the crisis, Swedish
banks have been passively deleveraging the Baltic markets and replacing their
funding credit lines with local deposits.
Loans constitute majority of the banking
assets. The structure of lending to the private
sector becomes increasingly household-biased, reflecting the banks' search for
safe assets (such as mortgage loans) and supporting the trend of growing
private indebtedness (see Section 2.1). Mortgage loans amount to 21% of the
balance sheet, compared with 18% in 2004. In recent years this loan category
grew at rates above 5% annually, which was double the rate of corporate loans
(Graph 2.3.1). The latter account for 16% of the
balance sheet, down from 22% ten years ago.
 Graph 2.3.1:   Lending to private sector 
 Source: ECB 
Swedish banking profitability is amongst
the highest in Europe. The average sector's return
on equity (ROE) in 2014 stood at 12.5% and the return on assets (ROA) 0.6%
(Table 2.3.1), putting Sweden above most other
European markets. Profitability of the major groups is even higher, with ROE
ranging between 14% and 21% in the third quarter of 2014. The high leverage,
high cost efficiency and high asset quality are the key factors behind banks’
profitability. 
 Table 2.3.1:     Financial soundness indicators 
 *Q2 Source: ECB 
Swedish banks benefit from high asset
quality. In recent years, the average
non-performing loan ratio (NPL) stayed below one percent, which was one of the
lowest levels in the EU (Table 2.3.1). Not only the disposable income of
borrowers and their payment discipline contribute to this phenomenon. A
substantial role is played by the very efficient public framework for debt enforcement,
based on the Swedish Enforcement Authority (Kronofogden). Most of impaired
loans are resolved in less than twelve months and do not pile up in banks'
book. The average coverage ratio of non-performing loans with loan loss
provisions stands at 63%, above the EU average (46%).
The average capital adequacy ratio is
high but the leverage ratio remains low. The
average Tier 1 regulatory ratio for the Swedish banking sector amounted to 18%
in mid-2014. However, in previous years the average Tier 1 ratio was
consistently the lowest in the group of peer markets. The proxy leverage ratio,
which relates banks' total accounting capital to their total assets, also
reveals the relatively low level of capitalisation of the Swedish banking
sector. At 6% it is one of the lowest in the EU. The particularities of the
Swedish capital adequacy are analysed in the second part of this section.
Financial markets play a major role in
funding of Swedish banks. Deposits account for 32%
of the banking sector liabilities, equal to the share of debt securities issued
by banks. Market funding is also partially covered by external liabilities
(21%), as banks also borrow on foreign wholesale markets and accept foreign
deposits. The low share of deposits is mirrored in the high loan-to-deposit
ratio, second highest in the EU after Denmark (Graph 2.3.2). The maturity mismatch between assets
(long term, often non-amortised loans) and liabilities (mainly short and medium
term debt securities) is particularly marked in the Swedish banking sector.
This funding structure stems partially from the cultural patterns, as Swedes
tend to place their savings in investment funds, pension funds and insurance
products. It is also incentivised by low funding costs for banks, owed to their
high market ratings and ample liquidity in international markets.
 Graph 2.3.2:   Loans to deposits, % 
 Source: IMF 
Assessment of policy responses
The Swedish Financial Supervisory
Authority (FSA) is responsible for micro-prudential supervision and
macro-prudential policy. The Riksbank and the
Ministry of Finance remain involved in the areas of their competencies, notably
through participation, together with the National Debt Office, in the Financial
Stability Committee.
Credit risk
The high and increasing exposure to the
household sector is the main credit risk of Swedish banks. While the financial soundness indicators present a sound picture of
the banking system, they are by their nature backward looking and do not fully
capture all the risks. A slump in households’ disposable income or an external
economic shock could translate in deteriorating asset quality of the Swedish
banks. The possible overpricing in the Swedish property market poses a risk to
banks’ balance sheets through a shrinking value of collateral of
mortgage-backed loans. This would put some borrowers in a situation where the
value of a loan exceeds the value of the house, which for banks could increase
losses on foreclosures and also indirectly contribute to funding problems.
Sweden has set higher capital
requirements than imposed by EU regulations. The
four large banks are required to hold minimum 13.5% of Common Equity Tier 1
capital as of 2015. The risk weight floors on mortgage exposures provide for an
additional capital backstop.  In order to address concerns about low risk
weights used in banks' internal risk calculations, the Financial Supervisory
Authority introduced a 15% floor on risk weights for mortgage exposures in May
2013, further increased to 25% in September 2014. The floor is applied in the
framework of the supervisory review (the Pillar 2 process, where an individual
assessment of financial soundness of each bank is carried out by the
supervisor, leading to defining own fund requirements on top of the regulatory
minimum) and translates into capital add-ons ranging from 0.7% to 4.8% of
Common Equity Tier 1 for the four largest banks. According to Financial
Supervisory Authority reports, in the third quarter of 2014 all banks complied
with the new requirements. 
Compliance with new capital requirements
was primarily achieved by the reduction of risk weighted assets. In 2014, the risk-weighted asset density, a measure of the share
of risk weighted assets in total assets, fell to a half of the end 2013 level
in three large banking groups. The fall was caused by the banks' transition to
advanced internal risk based models for calculation of capital requirements on
corporate exposures, following the approval by the Financial Supervisory
Authority. As a result, the increase of capital adequacy ratios of Swedish
banks was driven by the denominator effect.
Despite supervisory measures taken in
recent years, the ratio of capital to total assets remained stable. This proxy leverage ratio (not taking off-balance sheet exposure
into account) (Graph 2.3.3) confirms that compliance with the
higher capital requirements has been reached without substantially increasing
the amount of capital in the banking system. At the same time, the global trend
was to increase the share of capital in banks' balance sheets, as demonstrated
by the evolution of the average leverage ratio for the EU. It increased from
6.5% to 8.1% between 2009 and 2014. 
 Graph 2.3.3:   Leverage ratios (%) 
 *October data Source: ECB, European Commission calculations 
Funding risk 
The Swedish banking sector is
characterised by a high share of market funding in its liabilities, complementing the deposit funding. Loan-to-deposit ratios of major
banks have been gradually decreasing, but the funding structure remains
market-oriented. It is linked with the high degree of the banking sector
leverage and increases potential vulnerability to market shocks. The wholesale
market funding of Swedish banks also entails currency risks as banks issue the
bulk of their debt abroad. About 60% of the major banks market funding is
denominated in foreign currencies, mainly US dollars (especially short-term
securities) and euros, in quasi-equal shares. The foreign currency instruments
are typically held by foreign investors ([24]) 
The average maturity of market funding
instruments held by the banks increased in recent years. This is likely a result of both the Swedish authorities' actions
and the favourable market conditions for issuing long-term debt in the Nordic
countries, which were regarded by international investors as a safe haven
during the sovereign debt crisis in the euro area. 
Swedish banks benefit from low funding
costs linked with low risk premia charged by investors. It is related to high ratings and low credit default swap (CDS)
spreads of the main Swedish banks, supported by the triple-A rating and low
credit default swaps spreads of the sovereign. The low funding costs contribute
to the banks' high profitability. However, market conditions are prone to
change. It may be due to domestic factors (e.g. a drop in house prices) or come
as external shocks, for example with background in the military conflict in
Ukraine and its consequences such as trade restrictions, commodity prices or
monetary policy of major global economies. 
Major banks have made some progress in
reducing their structural liquidity risks. Banks
have started to adapt their funding structure in the wake of the 2008 financial
crisis extending the average maturity of their funding instruments, but the
process stalled in last couple of years. Per Riksbank's recommendation, the
banks should approach the minimum level of 100 per cent in the Net Stable
Funding Ratio (NSFR) ([25]). In the
third quarter of 2014, the NSFR, which is not binding until 2018, was at 89% or
higher for the major banks. Since 2013, the Financial Supervisory Authority
requires banks to abide by the minimum Liquidity Coverage Ratio (LCR) ([26]). In 2014, all major banks complied with this requirement and their
average LCR ranged between 120% and 140%.
In 2012, the Riksbank decided on a 30%
increase of its foreign exchange reserves. An
amount of SEK 100 billion (approximately EUR 10.4 billion) was added to the
existing pool of SEK 314 billion (approximately EUR 32.7 billion). The
motivation to increase the reserves was to provide a backstop for banks'
growing demand for liquidity in foreign currencies. The government in agreement
with the Riksbank and the Financial Supervisory Authority put forward a
proposal to charge the costs for maintaining the additional currency reserves
to banks in proportion to the foreign currency exposures in their liabilities.
The objective is to incentivise banks to reduce their currency risk. The
consultation process on the draft law is underway.
To summarize, the set of
macro-prudential measures taken by the Swedish
Financial Supervisory Authority in response to the growing private
indebtedness is becoming close to complete. They tackle both the credit
demand side (i.e. loan-to-value cap, amortisation requirements) as well as the
credit supply side (capital requirements, risk weigh floors). Yet, the
effectiveness of these measures is limited as lending to households has been
increasing on the back of strong demand, pushing up private sector
indebtedness. Once the proposed requirements to amortise loans to 50% of their
original value are implemented, the set of macro-prudential instruments
applicable to banks will be more akin to the variety of tools applied by
Sweden's EU peers (e.g. Denmark, the Netherlands).
The low share of deposits and the high
share of market funding constitute a structural risk of the Swedish banking
sector. An abrupt increase in funding cost due to
market shocks would be largely transferred to borrowers, given the high share
of variable interest rate loans. It would also impact negatively on banks'
profitability through primary and secondary effects (growing losses from
non-performing loans). The Basel III supervisory measures: the Liquid Coverage
Ratio and the Net Stable Funding Ratio, will contribute to mitigate the
refinancing risk of Swedish banks. However, given the banks' high dependence on
(foreign) financial markets, this risk cannot be eradicated. 
As the level of household indebtedness, the
evolution of the housing market and the stability of the financial sector are
interconnected, this section jointly analyses the macroeconomic and financial
stability risks stemming from the high indebtedness of Swedish households and
the imbalances on the housing market.
Households' financial resilience
Trends affecting households' resilience
The sharp increase in mortgage lending over
the last 20 years has gone hand in hand with several trends which can render
households less financially resilient:
·       Between 2002 and 2010, the loan-to-value ratio of new mortgages has
increased from 59% to 71%. This trend was curbed
after the introduction of an 85% loan-to-value cap in 2010 but rose again to
70% in 2013 ([27]) (Graph 2.4.1). In parallel, actual repayment
periods as well as the share of unamortised loans have been growing.
 Graph 2.4.1:   Loan-to-value ratios 
 Source: Financial Supervisory Authority 
·       Variable interest rate loans have become predominant, making
households more sensitive to interest rate changes ([28]). In March 2014, 53% of the borrowers
had a variable interest rate (in practice adjusted every three months) compared
to 46% in March 2013. As 73% of the new mortgage loans taken in the autumn 2014
were subscribed at a variable rate, the share of household with such loans
further increased to 57% ([29]). Furthermore, households' interest expectations are currently
misaligned with the Riksbank's projections (Graph 2.4.2). When the Riksbank starts increasing
its interest rate in the medium-term, this could have a significant impact on
households' budget and reduce their scope for consumption as their interest
expenditure would increase.
·       Possible income loss due to unemployment or sickness has become more
significant. Since the 1990s the unemployment and
sickness insurance schemes have changed and an increasing number of people are
reaching the unemployment benefits ceiling, which has not been increased since
2002.
 Graph 2.4.2:   Household expectations of the variable mortgage rate one, two and five years ahead 
 Source: The National Institute of Economics Research, Riksbank 
Mitigating factors exist but need to be
qualified
Rising households' disposable income and
substantial assets at aggregate level are often presented as mitigating factors
for high household indebtedness. However, the strength of these buffers needs
to be qualified. 
Households' disposable income has
strongly increased in the past years following the implementation
of the in-work income tax credit in several steps. This growth in disposable
income provides buffer for households but it has also fuelled home ownership
via indebtedness. Moreover, housing prices have increased faster than
disposable income.
At aggregate level, households have
substantial assets. The value of assets has
increased in line with rising housing and share prices and amounted to 600% of
disposable income at the end of 2013 ([30]). 
However, a large proportion of
households' assets is illiquid. For instance,
pension savings can only be used at retirement. Also, a large part of
households' assets rests in their house or apartment which might be difficult
to sell, particularly in periods of economic or financial shocks. This means
that the proportion of households' assets that can be quickly converted into
liquidities is much less than the aggregate value of households' assets. 
Moreover, assets can vary substantially
in value across time as exemplified by the recent
house price corrections in Denmark and in the Netherlands. In Denmark, it
impacted both the financial resilience of some households and the economic
growth despite large households' assets at aggregate level. 
Both assets and debts are unevenly
distributed across households. For households with
mortgages, the debt ratios are highest among low-income earners (Graph 2.4.3) ([31]). It is conceivable that households with a low income also have
fewer assets to cushion difficult situations. 
 Graph 2.4.3:   Household debt ratio in different income groups (only mortgage borrowers), % 
 The results in decile 1 should be interpreted with a certain amount of caution, as this group includes households with varying types of incomes. Source: Riksbank 
Following the abolition of the wealth tax
in 2007, there is a lack of recent statistics on the distribution of assets).
However, statistics from 2007 confirm that the indebted households with
the highest incomes owned the majority of real and financial assets and on the
other hand, low-income earners owned only a small proportion of total assets
(Graph 2.4.4).
 Graph 2.4.4:   Share of financial and real assets held by indebted households in different income groups, 2007, % 
 Source: Riksbank 
Transmission channels
A high level of indebtedness makes the
real economy more sensitive to shocks. If
households are affected by a shock to their income, their mortgage interests
expenditure or the value of their housing, their consumption will likely
fall. ([32]) Several
studies show that during the financial crisis that broke out in 2007,
consumption decreased more in countries with high household indebtedness than
in countries with lower indebtedness ([33]). Graph 2.4.5 illustrates this relationship between debt
ratio and consumption growth. Moreover, as consumption growth decreases, this
would also impact companies' production and investment which would lead to more
defaults in the corporate portfolio of banks.
 Graph 2.4.5:   Relationship between debt ratio and consumption growth, 2007-2012, % 
 Adjusted consumption growth has been calculated as actual consumption growth minus contributions from growth in debt ratio, current account and consumption. For further information, see Flodén, Martin (2014) Did household debt matter in the great recession? Source: OECD, Riksbank 
Should an adverse macroeconomic shock
occur combined with increased loan losses for banks,  confidence in the Swedish
financial system could be affected which would
negatively impact banks' access to wholesale funding. The increased funding
costs would be transmitted to higher interest rates for borrowers. This would
in turn aggravate the borrowers' situation and amplify the negative effects on
consumption and economic growth. The high refinancing risk is a structural
feature of the Swedish banking sector. The major banks have a large deposit gap
and have to fund half of their loan book on the financial markets, mostly in
foreign currencies. Supervisory measures taken by the Financial Supervisory
Authority may mitigate but not substantially alter the risks related to
dependence on foreign financial markets.  
The banking sector as such should be
relatively resilient to a macroeconomic downturn.
According to stress tests, banks' capital buffers are large enough to absorb
losses under the adverse scenarios. Stress tests based on Q3 2014 financial
statements by the Financial Supervisory Authority estimate the Common Equity
Tier 1 capital ratio decline to range between 1.1 and 2.5 percentage points for
the four major banks over a three year horizon. With the current capital
requirement set as the threshold, two banks would fall below the line and the
capital shortfall would dent their capital conservation buffers (Table2.4.1). The ECB/EBA stress tests published
in October feature similar results, with the Common Equity Tier 1 capital ratio
drop at 1.6 – 1.9 percentage points for the same group of banks. In the EU
exercise the threshold was set at a single and much lower level (5.5% Common
Equity Tier 1 capital). Under these assumptions, no Swedish bank recorded
capital shortfall. The capital buffers of Swedish banks are underpinned by
their high profitability, owed to high cost efficiency and payment discipline
of Swedish borrowers which translates into low levels of non-performing loans.
The dominant share of variable interest rate loans limits the risk to banks'
profitability in case of market interest rate increases.
 Table 2.4.1:     Stress test results: common equity Tier 1 ratio (CET1) 
 Source: European Banking Authority, Financial Supervisory Authority 
Macroeconomic risks linked to high household
indebtedness and imbalances on the housing market
This part analyses the potential impact of
a housing price decrease and an interest rate increase in the light of a model
developed by the European Commission and stress tests developed by the
Financial Supervisory Authority, the Riksbank and National Institute of
Economic Research.
Impacts of a housing price shock
 Table 2.4.2:     Estimated maximum impact of 10% decline of house prices 
 Source: European Commission 
The European Commission model suggests
that e.g. a 10% decrease in housing prices would cause a 1.4% decrease in GDP
and 2% in private consumption. For both of these
variables, the maximum effect of the shock is reached in the first year and it
takes slightly more than 3 years to return to the long term trend. These
estimates are in line with the average impact on GDP and private consumption
observed in countries comparable to Sweden.
Residential investment is much more
sensitive to house price movements, reaching an
estimated maximum decrease of 27% in the second year with only minimal return
to the trend. In this regard, Swedish residential investment seems to be more
vulnerable to house price shocks than in comparable countries. It should be
noted, however, that this relatively larger elasticity of residential
investment to downward or upward price changes is partly related to the
relatively low level of residential investment in Sweden (if measured as a
share of GDP) since the 1990s crisis. 
The direction of these shocks is in
accordance with expectations and the results are comparable to other models. Indeed, increasing house prices should contribute to increase
consumption through wealth effects, incentivise further residential investment
and increase GDP growth. The results obtained are comparable to the results of
a topical IMF model ([34]) and show a
more significant contraction in private consumption than a model developed by
the National Institute of Economic Research where a twice as big fall in house
prices over 4 quarters would produce a 1.8% fall in consumption  ([35]). However, the National Institute of Economic Research reaches
similar conclusions regarding the large reductions in both residential
investment and the negative effect on GDP growth. 
 Graph 2.4.6:   Swedish house price correction in 1990s, 1990=100 
 Source: OECD, IHS Economics 
Historic episodes of significant housing
price corrections in Sweden and comparable countries also confirm the model's
estimates. In the 1990s, Sweden experienced a
significant house price drop of almost 30% which was associated with a fall of
more than 5% in GDP and of almost 6% in private consumption within the first
two years. In response, residential investment fell by more than 70% within
four years. Moreover the recent Danish house price correction also provides a
comparison point. Since 2007, Danish house prices have fallen by almost 30%
while the residential investment registered a comparable decline; by the end of
2013 the GDP was still 5% below its pre-crisis level ([36]).
Impacts of an interest rate shock
An increase in interest rates should
lead to a decrease in consumption, residential investment and GDP. Simulations from the model point to a decrease in consumption by
0.8% after 12 quarters without significant return to the trend. GDP also
decreases by 0.9% and this maximum is reached around the same time as for
consumption. The correction for residential investment is most significant with
a 4% decrease. 
 Table 2.4.3:     Maximum impact of 1 pp. increase of interest rates 
 Source: European Commission 
In the current low-interest environment
any sudden increase in interest rates could have a very significant impact on macroeconomic variables whereas the impact of the same
percentage point increase from a higher starting interest rate could be less
pronounced.
This rise in interest rates can increase
the number of households with low or negative discretionary income (the income net of housing costs and subsistence costs). This could
quickly reduce households' scope for consumption. Moreover as interest rates
increase, household interest expenditure would also increase, leading to a
contraction in consumption. According to the Riksbank (Graph 2.4.7), interest expenditure currently
represents less than 3.4% of household disposable income. This is below the
historical average of 5% and the long term interest of 7.2%. According to the
Financial Supervisory Authority (Graph 2.4.8), a 3 percentage points interest rate
increase would raise the share of households with a negative discretionary
income from 2% to 4%, and from 2% to 7% if the interest rate increases by 5
percentage points ([37]). However,
an interest rate rise by more than 5 percentage points could lead the share of
indebted households with a negative discretionary income to exceed 21%([38]).
 Graph 2.4.7:   Swedish households' interest expenditure, % of disposable income 
 Source:  Statistics Sweden and the Riksbank 
Both the Financial Supervisory Authority
and the Riksbank point out that most households would be able to service their
loans but many would have to reduce their
consumption. This is in line with the econometric model results which show that
the effect of an interest rate increase by 5 percentage points could lead to a
4.5% reduction in private consumption. 
An increase in interest would also
negatively affect housing prices as the availability of loans and profitability
of residential investment would be reduced. Lower
residential investment leads to lower GDP which along with subdued private
consumption would both affect housing prices. The model estimates a 2.6%
decrease in house prices as a response to a 1% increase in interest rate.
 Graph 2.4.8:   Interest rate increase and share of households with a deficit, % 
 Source: Financial Supervisory Authority 
The well-established fiscal framework in
Sweden has contributed to provide the necessary
margin for automatic stabilisers to play their role in a context of a weaker
economic activity, even making room for discretionary fiscal stimulus in 2014.
As Sweden has used its available fiscal space to support the economy, the
general government balance has deteriorated in the short-term. However, Sweden
appears to face no major fiscal sustainability risks in the medium-term. 
Taxation
Swedish taxation is the fourth highest
in the EU with a tax-to-GDP ratio (including social
contributions) of 44.2% in 2012. Sweden has a relatively high tax burden on
labour.
In 2014, Sweden was recommended to
reduce the effects of the debt-bias in household taxation by gradually limiting tax deductibility of interest payments on
mortgages and/or by increasing recurrent property taxes. This relationship was
discussed in Section 2.1. Two public inquiries have tabled proposals on tax
reform. However, the proposed reforms that would be relevant for reducing the
debt bias are limited to redefining the calculation of the tax base and they
would not result in the necessary move away from debt bias in income taxation. 
Overall, there has been no significant
progress in reducing the debt bias in taxation affecting housing. The government has abstained from any reform of the taxation of
immovable property on the basis of the argument that such measures could
potentially be damaging to the efforts to restore growth. Measures to increase
the pace of amortisation of mortgages and other non-tax measures related to
mortgages have been deemed more suitable to reduce debt bias.
Regarding corporate taxation, in 2009,
tax provisions were introduced which reduced the tax deductibility of interest
payments for intra-group loans related to the acquisition of shares from an
affiliate. New legislation in 2013 further extended
the restrictions on interest deductibility to all types of loans, regardless of
their purpose. Interest payments are tax deductible if the creditor is taxed on
the interest at a rate of at least 10%, should the interest income be the only
income for the creditor (10% tax test), or if the debt has been taken on for
‘sound commercial reasons’. These measures, combined with the corporate income
tax rate cut from 26.3 to 22% at the beginning of 2013, aim to eliminate a
large proportion of corporate debt that is solely driven by tax avoidance
motives for which there is an increased risk in the case of cross-border
intra-group lending. A corporate tax expert committee delivered a report in
June 2014. The committee proposed further reductions of the tax-deductibility
of financial costs. It is noted that this would result in an increased tax
burden for companies with a high debt ratio. The committee also proposed that
those measures could be accompanied by further reduced corporate tax rates. The
measures recommended are aimed at further reducing debt bias in the corporate
sector and to counter tax avoidance.
Public debt sustainability
Sweden appears to face no major fiscal
sustainability risks in the medium-term. Government
debt (41.4% of GDP in 2014 and expected to decrease to 40.6% by 2016) is
currently below the 60% of GDP reference value in the Treaty. It is projected
to remain broadly stable until 2025.
The budgetary impact of population
ageing poses some challenge to long-term fiscal sustainability in Sweden, in
particular in the area of long-term care. Risks
would be lower in the event of the structural primary balance reverting to
higher values observed in the past, such as the average for the period
2004-2013.
The Swedish government has revised
expenditure linked to migration upwards in the
coming years. In the longer term, the resulting net population growth should
contribute to an expansion of the work force and GDP. ([39]) However, the long-term forecasts of the Swedish National Institute
of Economic Research also links migration to a marginally higher equilibrium
unemployment rate and lower productivity. ([40])
Fiscal framework
The Swedish fiscal framework, which is
characterised by a cautious approach, has been stable over time. In the past 20 years, Sweden's fiscal framework has put public
finances on a strong footing at both the central and local level. The framework
comprises three key components. First, a surplus target, encompassing the
finances of both central and local governments and the pension system,
stipulates that an overall budget surplus of 1% of GDP should be achieved over
the business cycle. In March 2014, the government issued a legislative proposal
to increase the accountability of the surplus target, by yearly follow-up with
the parliament and a requirement to demonstrate how the target is to be reached
in the event of a deviation between the target and forecast development.
However, the legislative proposal does not clarify the calculation method for
the surplus target. The achievement of the target is assessed against seven
different indicators, largely forward-looking. The multitude of indicators
without clear weights allocated to each impairs the clarity of the assessment
and could lead to an opportunistic interpretation. Second, a three-year nominal
expenditure ceiling for central government and the pension system controls
budget overruns and forces government departments to prioritise. Third, the
balanced-budget rule for local authorities forbids municipalities and counties
to approve ex ante deficit budgets and requires them to compensate for any ex
post deficits within three years. In 2013, new rules were adopted to allow
municipalities and counties to balance revenues counter-cyclically over time
through ‘results-balancing reserves’. 
In addition to the budgetary rules, the
Fiscal Policy Council (FPC) was established in 2007
with the task of providing an independent evaluation of the government’s fiscal
policy and compliance with the fiscal rules. Two aspects of the functioning of
the FPC could be improved. First, to avoid ‘opportunistic’ behaviour, the right
to access information from the Ministry of Finance could be guaranteed in the
legislation. Second, as legislators perform critical accountability functions
in budgetary processes, mechanisms could be put in place to ensure an
appropriate level of accountability of the FPC to the parliament. In its
current set-up, the FPC is a government agency that reports directly to the
government, which has the final say on appointing its members.
The Swedish budgetary framework complies
with Council Directive 2011/85/EU on requirements for budgetary frameworks of
the Member States but Sweden lacks a regular evaluation of the government’s
macroeconomic forecasts and budget forecasts, as
required by the Directive ([41]). The inquiry therefore proposed to maintain the overall process
and add a requirement for the government to regularly publish evaluations of
the forecasts presented in the autumn and spring Budget Bills. The government
acted upon these conclusions with a proposal in its 2014 autumn Budget Bill,
which was adopted by the Riksdag on 18 December 2013. Moreover, another
legislative proposal in March 2014 codified and extended the current practice
on the expenditure side of the budget to the revenue side: bills affecting
government revenues will have to be proposed as part of the legislative package
during the autumn and spring Budget Bills. These packages would also include
supplementary budgets detailing the impact of revenues or expenditures of these
bills.
The well-established fiscal framework
has played a specific role in preventing strong tax revenue in good times from
translating into pro-cyclical expenditure increases. This has provided the necessary margin for automatic stabilisers to
play their role in recessions, even making room for discretionary fiscal
stimulus.
The Swedish labour market is overall
characterised by a high employment rate (79.8%).
However, the outcome is relatively poor for low-educated and low-skilled young
people (with unemployment turning around 40%) and people (especially women)
with a non-EU migrant background (56.2% of non-EU born women and 67.9% of
non-EU born men are in employment). This should be seen in the light of
strongly increasing migration into Sweden over the last few years. Moreover,
basic skills attainment of young people has undergone a continuous decline
which may impact their employability in the longer-run and pose wider
challenges to competitiveness and innovation capacity in the future. As regards
social policies, analysis shows that the at-risk of poverty rate of women above
65 years in Sweden has increased considerably.
Labour market
The Swedish labour market, to a large
extent governed by negotiations between social partners at sectorial level, is
characterised by positive labour market outcomes.
The employment rate was 79.8% in 2013 for those aged 20-64, the highest in the
EU. Wage increases have been robust, averaging about 3% annually since 2005.
Since the onset of the crisis, the unemployment rate has turned around 8%. The
proportion of long-term unemployed is one of the lowest in the EU at 1.5% of
the active population, which limits the risk that unemployment becomes
entrenched, i.e. that people get further and further away from the labour
market through long unemployment spells (Graph 3.2.1). 
 Graph 3.2.1:   Labour market 
   
 (1) NEET refers to 'Not in education, employment or training' Source: European Commission 
Youth unemployment remains high (22.9%
in 2014), in comparison to other Member States with
strong overall labour market performance. However, some 77 000 out of the
163 000 young unemployed were full-time students, with an additional
12 000 also in education but on leave (Graph 3.2.2). Moreover, the Swedish ratio of the
unemployment rate for non-student young over total unemployment is similar to
these other Member States, and unemployment spells are typically short (16
weeks) compared with that of adults (42 weeks for 25-54-year-olds in 2013).
 Graph 3.2.2:   Youth unemployment rate in EU Member States by educational status, 2013 
   
 Source: European Commission 
Insufficient educational attainment is
an important explanatory factor behind youth unemployment. Low-educated and low-skilled young people experience almost
40% ([42])
unemployment, whereas for young with completed tertiary education the rate is
14.9%. The share of young persons not in employment, education or training is
low compared with EU-28 (7.5% in 2013) ([43]), but not in comparison to Member States with relatively good
labour market outcomes. Although the early school leaving rate remains well
below the EU average (7.1% compared to 12% in 2013) and the national and EU
target of 10%, the share of young people who have not completed upper secondary
education successfully at the age of 20 remained close to 25% and at a higher
level than in the early 2000s.
The transition from school to work
remains a challenge. Participation in vocational
education and training is decreasing rapidly. While until 2009 the same share
of students attended academic and vocational programmes at upper secondary
level, in 2014 almost twice as many students opted for an academic programme.
This shift coincides with the 2010 Education Act, which no longer grants basic
eligibility to higher education to vocational programme students. Furthermore,
apprenticeships have suffered from low take-up and high drop-out rates since
the 2008 piloting phase. Although between 2013 and 2014, the number of
apprentices increased from 6 000 to 7 300, it represents only 7.3%
of all students in the vocational track, and it is still far lower than the
30 000 apprentices projected by the government for 2011-14. In addition,
in the period 2008-11, 25% of apprentices dropped out already in the first year
and only 44% completed the three-year programme compared to a 68% completion
rate in a school-based vocational programme. ([44]). Vocational introduction employment (a type of collective
agreements) is gaining in popularity and has the potential to become a new
pathway to jobs for young people. However, it is mainly available for people
who have completed upper secondary education. 
Over the last few years, migration into
Sweden has increased substantially (Graph 3.2.3) and in proportion to the number of
inhabitants, Sweden receives a comparatively large number of refugees. Last
year, more than 80 000 asylum seekers were registered in Sweden (i.e.
roughly 1% of the total population). The Swedish Migration Board estimates that
the number of asylum seekers is likely to stay at high levels going forward and
increase to 80 000-105 000 persons in 2015. The Swedish government
is currently reviewing the legislation, among other things with the objective
to make all municipalities contribute to the reception of asylum seekers (until
now, the concentration of asylum seekers in a limited number of municipalities
has been high, also linked to the fact that reception has been volountary). At
the same time, the economic and institutional framework of the municipalities
will be strengthened in this regards.
 Graph 3.2.3:   Number of asylum seekers coming to Sweden 1995-2014 
   
 Source: Swedish Migration Board 
The increased migration results in an
important challenge, namely the integration of migrants into the labour market. The non-EU population still faces lower employment rates and higher
unemployment rates. Non-EU born women are particularly affected by low
employment rates (56.2% of non-EU born women are in employment, compared to
67.9% of non-EU born men and to 77.2% of women in Sweden in 2013). In
particular, among the recently arrived non-EU born population, in 2013 only 57%
of men and 35% of women were in employment (Graph 3.2.4). 
 Graph 3.2.4:   Employment rate (20-64) for non-EU born and non-EU nationals compared to total population in Sweden, 2013 
   
 Source: European Commission 
Sweden has a high and currently
increasing proportion of asylum seekers within the large number of recent
migrants. These persons take longer to integrate in
the labour market due to insufficient education and skills, including language
and qualifications mismatches, and discrimination. ([45]) Sweden has larger differences between non-EU nationals and Swedish
nationals in employment among 20-64 year old persons (50.2 vs. 81.3%),
unemployment among 15-64 year old persons (29.9% vs. 7.4%) (Graph 3.2.5) and activity rates among 20-64 year
old persons (70.4 vs. 86.7%) than other EU Member States, including those with
a similarly large migrant population such as Austria, the Netherlands and the
United Kingdom. There is also a large gap in the employment rate between
migrant women and men (41% vs. 59%). The unemployment rate among young (15-24)
third country nationals is very high, 46.8% compared to 33.9% for EU nationals
and 22.6% for Swedish nationals. In addition, the share of workers with
tertiary education being in low or medium-skilled jobs is much higher among
third country nationals (42%) than on average in the EU (16%) and among Swedish
nationals (15%).
 Graph 3.2.5:   Unemployment rate (15-64) for non-EU born and non-EU nationals compared to total population in Sweden, 2013 
   
 Source: European Commission 
It seems that the challenge linked to
the integration of migrants into the labour market is particularly pronounced
in the short – medium/term (up to ten years). In
the long-term, the situation is different 15 years after arrival more than 70%
are employed, which is above the EU average, even if not as high as for
Swedish-born. Since the entry into force of the Introduction Act in 2010,
Sweden has focused on the objective to speed up the entry into employment by
coordinating introduction measures through the Public Employment Service. The
maximum length of the introduction plan is 24 months, after which unemployed
migrants have access to the mainstream employment services. However, as the
influx of migrants is currently increasing and their profile is changing, it remains
to be seen whether the long-run absorption capacity of the Swedish labour
market is affected in the next years. Presently, 26% of newly arrived migrants
were either in work or education 90 days after having finished the introduction
plan.
Sweden has one of the lowest wage
dispersions in the EU, with high entry wages and little wage progression. The compression of wages may prevent them from reflecting the
productivity differentials between individual workers or sectors, thereby
limiting the employment prospects of vulnerable groups with lower productivity.
Coupled with a relatively high level of overall employment, the low wage
dispersion also has certain benefits, such as reducing the need for
redistribution through the state, and contributing to higher incentives for
taking up employment for low-skilled jobs. In this context, employment
subsidies de facto reduce the binding nature of high entry wages ([46]) by bringing down the overall labour cost.
Employment subsidies can lead to
deadweight loss and substitution rather than net job creation. Ensuring that employment subsidies are adequately targeted is
therefore important, so as to promote the employability and social inclusion of
those furthest away from the labour market, in particular by taking into account
criteria such as age, educational background and work experience. Wages that
fully reflect productivity differentials and further efforts to improve human
capital of the low skilled could also contribute to higher employment of
vulnerable groups.
There are signs of dualisation of the
labour market, i.e. a division between those with
permanent contracts enjoying higher wages and more extended rights and job
security than those with temporary contracts. The share of temporary workers of
16.3% is above the EU average of 13.7% in 2013, and their wages are much lower
than those of their permanent counterparts ([47]).The skills gap between temporary and permanent workers seems
particularly large in Sweden ([48]), which may make temporary workers less of a substitute to
permanent workers. The relatively large gap between high protection for workers
with regular contracts and relatively limited protection for those on temporary
contracts may contribute to this skills gap, by making temporary workers much
easier to replace than permanent workers, and reduce employers' incentives to
provide training. While temporary workers are also offered on-the-job training,
increasing it further could improve transitions to permanent employment and
reduce the corresponding wage gap. Dualisation related concerns are
nevertheless mitigated by the low long-term unemployment rate.
New initiatives provide broader paths
from school to work through vocational education and apprenticeships. The legal framework to monitor transition, in place since 2010,
will be further strengthened by a systematic tracking of graduates in
vocational education and training. An “apprenticeship reform”, included in the
2014 Spring Budget Bill, is being implemented. Furthermore, a new regulation
entered into force on 1 July 2014, which made salaries for secondary school
apprentices possible. A governmental inquiry is currently investigating the
conditions for testing so called "industry apprenticeships" with
greater influence of employers on programme content. In line with the Youth
Guarantee, Sweden has worked on facilitating the transition from school to
work, including widening the use of work-based learning and apprenticeships. 
As regards the Youth Guarantee for
persons not in employment, education or training, the strengthening of
municipalities' responsibility to monitor young persons under 20 who are not in
education is an important change in handling youth at risk of exclusion. Since 2015, municipalities are not only required to provide
appropriate individual measures but also to keep record of the interventions.
The main focus is on return to education rather than labour market activation.
A functioning partnership between the public employment service and various
services and actors at the local level is important for the strengthened
municipal responsibility to have effect. Sweden also has considerable scope to
improve the early intervention aspect in relation to persons not in employment,
education or training. 
Youth labour demand measures are not
optimally targeted. Sweden has several wage
subsidies in place to stimulate demand for young workers. However, studies have
shown that previous general reductions of social contributions have not
benefited those who have not completed education and are furthest away from the
labour market ([49]).
A set of new measures targeted towards
integrating newly arrived migrants into the labour market took effect in August
2014, including the introduction of conditionality
upon acceptance of a suitable job offer. The Swedish Council for Higher
Education is also working on validation of foreign qualifications in order to
shorten the transition to the right job. However, despite this reform and the
measures of recent years, Sweden has not managed to significantly improve the employment
situation of non-EU migrants, especially among women, or to address the fact
that many migrants with tertiary education are in employment in low or
medium-skilled jobs ([50]). In
February 2015, the Swedish government took the initiative to launch tripartite
discussions with social partners in order to review the labour market
integration of migrants and actively work to reduce discrimination at the work
place.
Education and skills
School education outcomes in Sweden have
deteriorated since the 1990s in terms of basic skills attainment. The performance of 15 year-olds in the OECD’s Programme for
International Student Assessment (PISA) surveys (PISA is a triennial
international survey to evaluate education systems worldwide) continuously
declined between 2000 and 2012 in all three core subjects measured -
mathematics, reading and science - with Sweden now performing below both the EU
and OECD averages (Graph 3.2.6). The performance decline is
particularly noticeable in mathematics, where the proportion of top performers
has roughly halved over the past decade and one in four students does not reach
the baseline level of performance. 
 Graph 3.2.6:   Deteriorating trend of education outcomes in Sweden 
   
 Source: OECD PISA survey 
There is a declining trend throughout
the school system, municipal and independent schools alike, and among all groups of students, regardless of socioeconomic
status or migrant background ([51]). The performance gap is however large between native-born and
foreign born.
The low attractiveness of the teaching
profession is an important obstacle to increasing the quality of education. Teachers perceive their status as extremely low, ([52]) with only 5% of teachers reporting that their profession is valued
in society, compared to 60% in Finland or the EU average of 19%. Teacher
recruitment and retention are also hindered by the perceived high workload and
deteriorating working conditions. Teachers in Sweden spend a relatively longer
working time on administration and feel to have less influence on their
learning environment. Increased responsibilities have not been accompanied by
higher salaries. Teachers’ starting salaries are within the OECD average but
the wage progression is very limited. The highest maximum wage levels are
around 25% lower than the OECD average (Graph 3.2.7). Furthermore, teachers’ salaries are
on average 20% lower than the salaries of other professionals with comparable
education levels.
 Graph 3.2.7:   Lower secondary teachers' salaries in some EU member states at different points in their career (2012) 
   
 * Salaries at top of scale and minimum training, instead of maximum qualifications. Actual base salaries. Year of reference 2011. Countries are ranked in descending order of starting salaries for lower secondary teachers with minimum training. Source: OECD 
The teaching workforce is ageing and
replacement rates are insufficient: 15% of
secondary school teachers in Sweden were over 60 years old in 2012, well above
the OECD average of 8%. At the other end of the spectrum, the proportion of
young teachers – those under 30 – is only 7% compared to the OECD average of
11%. The widening teacher shortage raises concerns: Statistics Sweden estimates
that by 2020 the school system may lack over 40 000 qualified teachers
and nine out of ten employers already signal a shortage of newly qualified
teachers in mathematics and science at secondary level. In addition, only half
of mathematics and science teachers have sufficient subject knowledge together
with qualifications in pedagogy.
Equity in education has been declining. The selective use of the school choice system risks penalising
students whose parents do not make an active choice and risks weakening
students’ right to equal education ([53]). Teachers in Sweden are less equitably distributed among schools
than in most other OECD countries: schools with a large share of
socio-economically disadvantaged students are more likely to suffer from
teacher shortages. There is a rapid increase in the share of schools where over
20% of students do not obtain the necessary grades to continue their studies in
an upper secondary programme preparing for university education. Moreover,
Sweden does not have a comprehensive strategy to tackle early school leaving,
although preventive measures are in place in the 2010 Education Act and the
accompanying regulations. 
The system of integrating newly arrived
migrant students shows a number of shortcomings:
poor mapping of students' previous knowledge, physical separation of newly
arrived from the mainstream and a lack of individualised support. ([54]) Only 52% of students who migrated after the age of 7 qualify for a
‘national upper secondary programme’, compared to the national average close to
90%. The other half of all newly arrived students are offered one of the five
upper secondary 'introductory programmes', launched in 2011 with the ultimate
goal to prepare students for one of the national programmes.
Past education reforms promoting
decentralisation and school choice were not sufficiently accompanied by
centralised quality assurance mechanisms. Since the
mid-1990s municipalities have been at the forefront of implementing nationally
set goals and requirements. However, in particular smaller municipalities
lacked local capacity to manage their new responsibilities and decentralisation
took place without enough support from the central authorities. ([55]). Difficulties related to the shift have been signalled The
introduction of school choice paired with independent education providers was
meant to create incentives for schools to offer better quality. However, recent
research finds no strong evidence of positive effects on the different student
groups ([56]).
There is no conclusive research to
explain the declining basic skills attainment. A
new agency, the Institute for School Research, became operational on 1 January
2015 to strengthen the evidence-base of reforms and disseminate information on
education research results. Furthermore, an independent school commission, to
be established in spring 2015, is to propose long-term school reforms and
national goals. The school commission is also meant to build its work on a
forthcoming external, OECD in-depth analysis of the Swedish school system. 
The government is taking steps to
improve school outcomes. In addition to the
strengthened municipal responsibility, targeted provisions (including summer
schools and classroom assistants) remain in place for students who do not have
the necessary grades to continue their studies at upper secondary level after
the current nine years of compulsory schooling. Homework help is also expected
to continue to be supported, although there is no evidence that this support
has reached students most in need. Knowledge standards will be set in reading
and an assessment tool will be developed in Swedish and mathematics for the
first school year (age 7). Additionally, a knowledge requirement is to be set
in literacy. The number of teaching hours has been increased in mathematics (up
to 120 hours a year) in compulsory schools at the cost of EUR 55 million per
year.
Reforming the teaching profession is the
government’s top priority. The government supports
teacher in-service training through collaborative learning. In 2015-18 around
40 000 teachers will be able to participate in specific training.
Moreover, the government allocates SEK 40 million every year for ‘training
schools’ from 2014 until 2019. The first 15 specialised ‘training schools’ have
started to accommodate future teachers. Following the career development
reform, since autumn 2013 one in six teachers benefits from an increased salary
and the career advancement steps created for so-called ‘lead teachers’ and
‘senior lecturers’. From July 2015, only teachers with so called
'accreditation' will be allowed to grade students and be employed on a
permanent contract. The measures do not address the overall unfavourable wage
progression of teachers or the increasing teacher shortages. It will also take
time before the current negative image of the profession can be reversed. 
The implementation of school reforms and
resource allocation continue to differ widely among municipalities. A limited number of municipalities have been using the legal
possibility to reallocate resources to schools with low-performing and/or
socially underprivileged students. Since 1 July 2014 they are obliged to
consider socio-economic factors in school financing, however the law does not
quantify any targets. Furthermore, the National Audit Office recently showed
that state grants do not reach schools that need them the most ([57]).
The government aims at improving the
integration of newly arrived migrant students. To
this end, it announced in December 2014 a comprehensive proposal for reforming
the reception of newly arrived students. An important element of the proposal
is the assessment of students' prior knowledge and schooling background,
although the framework and support structure for schools and municipalities are
still to be elaborated. A government grant for increasing teaching hours for
the newly arrived in compulsory school has been put in place. However, the
impact of the upper secondary 'introductory programmes' is yet to be assessed.
In February 2015, the government announced that municipalities will be given
increased support to be able to provide newly arrived children and young people
with a well-adapted child care and school education.
Social policies
Sweden generally has low levels of
social exclusion and poverty in comparison with the EU average, although income
inequality has increased substantially since the early 1990s. ([58]) Relative poverty ([59]) among women above 65 years has also increased considerably lately ([60]) and the
gender gap has widened. This at-risk-of poverty rate now stands at 22.3% for
women vs. 9.2% for men. By contrast, the gender gap in exposure to severe
material deprivation is insignificant at roughly 1.5% for both men and women
above 65 years. The high at-risk of poverty rate among women above 65 and its
rise seem caused by a combination of factors. First, the 2007 changes that
lowered taxation of earned income but not of pensions has impacted on the
poverty risk of pensioners with the lowest entitlements. Second, the effect of
the 1999 pension reform introducing a defined contribution-based pension system
has gradually materialised. Earnings-related contributions over the entire
working career will increasingly determine the entitlements of new retirees.
Gender differences in working hours, duration of working life and remuneration
will therefore be increasingly much more reflected in the pension outcomes for
men and women. Lastly, the poverty risk for retired women has also risen
because the survivor's pension was abolished with the 1999 pension reform. In
this context, it is worthwhile to note that Swedish pensioners have access to
subsidised social services and personal care (such a meal distribution,
personal hygiene, grocery shopping, cleaning services etc.), capping expenses
irrespective of the extent of the needs of the individual, which to some extent
compensate for this group’s lower income. The possible wealth of individual
households might also alleviate low income levels.
Gender segregation in occupations and
sectors and the high share of part-time employment amongst women (36.3% for
20-64 years old women in 2013 compared to 11.7% for men) both contribute to the
gender pay gap of 15.9%. Moreover, while Sweden has
one of the highest female employment rates in the EU, the intensity of women’s labour
market participation has remained significantly lower than men’s, resulting in
a total earnings gap of 29.9% ([61]).
The Swedish government’s social policy
is sharply focused on reducing social exclusion through labour market
integration, but progress in further reducing the
gender earnings gap is proving to be slow and elusive. Moreover, efforts at
promoting long-term gender equality in the labour market do not address the
situation of today's female pensioners. Swedish authorities are reviewing the underlying
mechanisms that may affect the at-risk of poverty for present and future
generations of women.
 Graph 3.2.8:   Age distribution of asylum applications of unaccompanied children in 2014 
   
 Source: Swedish Migration Board 
The strong migration means an increased
pressure on social services provided by the municipalities. Some municipalities face particular challenges in terms of caring
for unaccompanied minors (of which 7 000 arrived in 2014). While the vast
majority of asylum-seeking children not accompanied by a caretaker are almost
adults on arrival in Sweden (Graph 3.2.8), the authorities are responsible for
ensuring well-suited care in family conditions for the remaining, smaller
children.
While Sweden may not be in a position to
reach its Europe 2020 targets the country is still an innovation leader on the EU level. Diminishing private funding is also partly
compensated by public R&D investment. The business climate is overall
favourable and Sweden is taking steps to invest further in renewable energy
sources. 
Business environment
Sweden is characterised by a favourable
business environment, having consolidated its position as one of the EU’s most
competitive economies. The country benefits from
strong institutions and minimum tolerance for corruption, as well as an overall
efficient public administration. 
Nevertheless, Sweden may be losing
ground: according to the 2014/2015 Global
Competitiveness Report of the World Economic Forum, Sweden fell by four steps
to tenth place (after e.g. Finland, Germany, the United Kingdom and the
Netherlands). While Sweden performs well in areas such as innovation capacity,
ICT adoption, infrastructure and macroeconomic conditions, the World Economic
Forum report notes that labour market regulations (Section 3.2) and potential
distortions that a high tax rate system may create (Section 3.1), are two
elements that are considered the two most problematic factors for doing
business in Sweden and could also hamper investments. 
In general, investment levels in Sweden
are in line with those of comparable EU Member States (for instance the Netherlands or Denmark). Over the past years,
however, investments in the traditional private sector have been held back by
the gloomy economic situation in trading partner countries. Instead, the
development has primarily been driven by the service sector and through public
projects. Cost benefit analyses of Swedish public investment projects suggest
limited added value, and hence that investment levels are not per se
unduly low. ([62])
Nevertheless, in an international perspective housing investment has been
particularly low since the crisis of the Swedish construction sector in the
early 1990s. Investment in residential property finally picked up in 2014, but
the built-up under-supply means that investment needs remain in this area, also
in light of the strong demographic developments and rising urbanisation
(Section 2.2). Infrastructure is another area where investments are needed
(Section 3.3).
Manufacturing remains an important
generator of product innovation and export income in Sweden but the economy
continues to move towards services and greater
integration of products and services. Currently, two thirds of GDP comes from
the services sector in which over 60 % of all firms are active. 
Sweden is one of Europa's leading
countries in terms of digitisation of its economy. ([63]) However, coverage of very high speed broadband networks is low
(71% of the population) compared to the needs of an advanced economy like
Sweden's and delays in the deployment of this critical infrastructure could
constitute a drag in the country's economic performance. Sweden recognises the
importance of these investments and mobilises significant national and EU
structural and investment funds to support the deployment of such
infrastructure, where commercial conditions are missing.
Sweden’s export market share has been
falling for a number of years, although market
share losses in goods are increasingly compensated by gains in services
exports. In general, the productivity of the Swedish services market is rising,
with both employment and value added growth figures in market services being
among the top in the EU over 2008-12 (Graph 3.3.1). 
 Graph 3.3.1:   Employment and value added growth in market services, 2008-12 
   
 Source: European Commission 
Sweden still retains a strong
comparative advantage in traditional export products (Graph 3.3.2) such as pulp and paper, and wood
products, although in particular machinery, metals and pharmaceuticals are also
of big importance for Swedish export. The sluggish demand of the euro area,
which traditionally receives roughly 40% of all exports, has of course affected
exports, which however should be helped by the recent depreciation of the
Swedish krona.
 Graph 3.3.2:   Swedish goods sector: comparative advantage 
   
 Source: European Commission 
Starting a business has so far taken
more time in Sweden than on average in the EU, with
the lead time until recently having been around two weeks, substantially longer
than the agreed Small Business Act target of three days. In this regard,
improvements have been announced which are likely to bring down the required
time substantially, e.g. the development of an IT tool which can check company
names before submission of the request, thus reducing start-up times. 
SMEs’ access to finance remains good, being problematic for only 9% of firms (as compared to the
EU-average of 15%). Swedish SMEs rather identify finding customers as the
largest challenge. In a recent survey commissioned by the European Commission,
a high proportion of Swedish SMEs (70 %) received the financing they sought
(EU: 65%) and only 8% of applicants were rejected (EU: 13%). Only 17% of
surveyed applicants used their most recent loan for working capital purposes,
which shows that the majority of companies have sufficient internal funds
and/or are generating enough cash flow to finance their day-to-day business.
Banks are generally considered to be slightly more willing to provide finance
to SMEs than in previous years. 12% of SMEs have used equity financing, which
is considerably higher than the EU average (5%). In general, risk capital has
been accessible during the past decade but mainly for high-tech investments. It
has been more challenging to obtain funding for clean-tech and life-science
investments and demand for early-stage venture capital has generally been
higher than supply. The situation looks promising as regards future access to
finance. ([64]) 
In terms of policies aimed at promoting
competitiveness, the new government has declared its commitment to the Swedish
simplification programme for companies, one of the
objectives of which is to decrease and simplify reporting requirements. The 'once
only' and 'easy submitting' principles aim to ensure that businesses
need only supply information once, because the public agencies share data. The
objective is also that data submission should be as easy as possible. By 2020,
businesses should only be required to submit information once, and to one
place, in most cases. The recently introduced so called ‘investor’s
deductibility’ allowing individuals acquiring shares in a new or expanding SME
to deduct half of the purchase amount up to SEK 650 000 per person and
year, should also facilitate the development of start-ups and innovative SMEs.
Less than 1 per cent of Swedish SMEs are exporting to the growth markets China
and India, compared to more than one fourth of large enterprises. Exporting
behaviour is positively correlated with broadband internet usage. ([65])
The efficiency of the Swedish
pre-insolvency framework is relatively high, although also quite costly. Nevertheless, a well-functioning mechanism for preventive
restructuring is important in a modern business environment.
 Graph 3.3.3:   Overall efficiency of pre-insolvency framework 
   
 Source: European Commission 
The share of contract award notices with
proper price information published under EU public procurement rules by Swedish
authorities and entities remains low and far below the EU average. In 2013, only 8.7 % of the contract award notices contained any
information on the value of contracts, which is to be compared with 74% on
average in the EEA. Moreover, data over time reinforces the picture that the
low quality of contract award notices is a recurrent issue in Sweden. The actual
impact of the missing information is difficult to estimate, as it concerns
reporting on contracts that have already been advertised as such. The likely
impact for EU businesses interested in public contracts in Sweden is indirect,
as they cannot verify the actual value of the opportunities that remain
unreported. Consequently, when establishing strategies for future procurement,
these businesses will not know whether they should lower their prices in
tenders to be more competitive. Furthermore, as information on actual contract
values is not accessible, it will be more difficult to verify that the
contracts have not been modified or that the prices paid correspond to proper
market prices. Insufficiently transparent public procurement procedures may
risk discouraging in particular foreign firm and SMEs (Section 2.2 on the
Swedish housing market), whereas a larger proportion of foreign firms that
would be active on the Swedish public procurement market could shift the
Swedish current account surplus (Section 1). In this context, the new authority
for public procurement support that will become operational as from September
2015 will have an important role to play to share best practice.
Research and development
Sweden has the second highest level of
R&D expenditure as a share of GDP in the EU (3.2% in 2013) and is
considered to be an innovation leader according to the Innovation Union
Scoreboard 2014. High investments in R&D, a
strong science base and a business-friendly environment represent key strengths
of Sweden’s R&I system. Up to 70 % of research, development and innovation
can be attributed to the business sector. Most of the research, development and
innovation outside of the business sector is carried out by the higher
education sector.
Nevertheless, the Swedish innovation
environment seems to be losing its capacity to retain and attract business
R&D investment. First of all, Sweden's overall
strong position in R&D is vulnerable due to its dependence on a few large
multinational companies, which are increasingly relocating their R&D
activities away from Sweden. Secondly, the performance of the country as
regards both the commercialisation of innovative products and the interaction
between academic sector and industry present additional challenges. Moreover,
as some Swedish regions have a weak innovation performance, they risk
permanently lagging behind also in terms of growth and employment, and it
appears important that they make full use of research and innovation strategies
for smart specialisation.
In line with the principle of
growth-friendly fiscal consolidation, Sweden has continued to prioritise
research and innovation public investment in order
to mitigate the negative effects of declining R&D business expenditure. The
Research and Innovation bill adopted in 2012 in fact foresees that a growing
share of funds, totalling roughly EUR 1 billion until 2016, is going to be
allocated, to research and innovation activities. The overall aim of the bill,
which sets out the policy priorities for 2012-16, is to increase the quality of
research, and to strengthen the links between R&D investments and economic
growth. Funding to research and post-graduate education has been increased.
Institutional funding to universities is increasingly awarded on the basis of quality
and performance indicators. To further enhance investments in R&D, employer
contributions have been reduced by 10% as from 1 January 2014 for staff working
in R&D. Additional measures have been launched to boost the innovation
system (e.g. innovation voucher scheme or Innovation Projects in Companies
programme) and to enhance its effectiveness through reinforced public-private
collaboration. 
Several initiatives aimed at reinforcing
public-private cooperation are now fully
operational. The industrial research institutes have been strengthened to act
as an interface between academic research and product development in the
business sector. Innovation offices at the universities and higher education
institutions, as well as the innovation infrastructures, have received
additional funding. At the same time, Swedish authorities have been working to
modify the current legislation on patent rights and deductibility of donations
to R&D. 
Maximum priority is assigned to R&D
for the new programming period of the European Structural and Investment Funds, both as reflected in the Partnership Agreement and in the
2014-2020 operational programmes. In fact, the government has decided to
allocate 65.7% of Sweden's structural funds dedicated to R&D for technology
transfer and improvement of cooperation networks.
The implementation of the R&I bill
seems to be on track with efforts being made to
restore the attractiveness of the business environment, to encourage young
firms to develop new technologies and innovative solutions and to foster
research and innovation partnerships between business sector and universities.
However, the pursuit of an active innovation policy and healthy investments in
R&D need to remain a top priority for the Swedish government as there is a
risk that Sweden may not achieve its Europe 2020 target of 4% of GDP R&D
investments. In this respect, the objective also presupposes private
initiatives that are willing and able to take on risk.
Environment, energy, infrastructure and
transport
While Sweden is making good progress
towards the achievement of its climate EU targets, emissions from
transportation have only decreased marginally since
2005 and remain a particular policy challenge. These emissions make up 25% of
its total greenhouse gas emissions and 45% of emissions covered by Sweden's
national EU target. Although average emissions from newly registered Swedish
vehicles decreased by 15% between 2005 and 2010, the Swedish vehicle stock is
still relatively inefficient compared to the EU average, with new vehicles
emitting about 7% more than the EU average per kilometre driven in 2013. The
average size of new cars in Sweden is significantly larger than the EU average,
and mass and CO2 emissions are highly correlated In the context of emissions
targets, it is worth highlighting that Sweden has adopted a voluntary national
target to reduce non-ETS emissions by 2020 by 40% compared to 1990 and by 33%
compared to 2005, of which two thirds should be achieved domestically.
In order to stimulate further emissions
reductions in the transport sector, tax measures and pilot programmes promoting
low-carbon emission vehicles and technologies are being promoted, including for biofuels (that have become an important element in
Swedish energy supply). A government inquiry on measures to reduce the
transport sector’s emissions and dependency on fossil fuels was published in
December 2013, and was thereafter consulted with concerned stakeholders.
However, the new government has not yet proposed any concrete measures in this
regards. Sweden no longer has a registration tax for vehicles, which on the one
hand represents foregone revenue for public finances but on the other hand may
incentivise car owners to purchase relatively more environmentally-friendly
cars.
Sweden was the first country to
introduce a green tax shift in 1990, but revenues
from environmentally-related taxes are not keeping pace with GDP growth. Partly
this has been due to the behavioural impacts of taxes, and the fuel shifting
within the domestic heating sector away from fossil fuels. On the other hand,
this can be said to represent a success, as between 1990 and 2012 Sweden’s
total greenhouse gas emissions fell by 13% while GDP per capita increased by
42%. The decreasing emissions is a direct consequence of the decoupling of
energy consumption and economic growth that Sweden has achieved in part through
structural change towards the services sector and in part through improved
energy efficiency (Graph 3.3.4). Finally, the economic recession has
also affected the outcome. As regards Sweden’s green tax shift, in 2012
environmental taxes generated revenue equivalent to 2.49% of GDP in Sweden,
just above the EU average, but on a declining trend. Hence, there might be room
for a possible further tax shift.
 Graph 3.3.4:   Greenhouse gas emissions and real GDP growth in Sweden 
   
 Source: OECD, Swedish Environmental Protection Agency (2013 data) 
Sweden is not on track in meeting its
national energy efficiency target (as defined in
national measures implementing the Energy Efficiency Directive) for either
final or primary energy consumption. In general, Sweden maintains a good mix of
different types of energy-saving measures and both primary and final energy
consumption decreased 2005 to 2012, but this trend has since then been
reversed. This suggests that Sweden has to increase efforts to further improve
energy efficiency, including as regards the existing building stock. In this
context, the government will allocate SEK 1 billion (roughly EUR 110 million)
on improving the working environment and the energy efficiency in schools in
the period 2015-18. 
As regards energy infrastructure, there
is significant congestion between the hydroelectric power plants of the north
and the demand centres in southern Sweden, in spite
of Sweden’s very extensive electricity transmission network. Sweden is in
general well interconnected with neighbouring countries. This, however, cannot
be said about natural gas which on the other hand plays a relatively small role
in the energy system and the gas infrastructure is not extensive. The current
level of electricity interconnections (24% of generation capacity in 2011) will
increase further once the electricity interconnection between Sweden and
Lithuania (known as the project Nordbalt) becomes operational in early 2016.
The investment has been co-financed by the European Energy Programme for
Recovery and will contribute to further the integration electricity markets in
northern Europe.
The new government has announced its
wish to replace nuclear energy by renewable energy and energy efficiency. According to the government, Sweden shall have 100 per cent
renewable energy in the longer-term. With a share of 51% in 2012, Sweden
already reaches its Europe 2020 target of 49% renewable energy (Graph 3.3.5). 
The efforts to boost renewable energy
reliance will also generate substantial investment, as the government considers
that at least 30 TWh of electricity from new renewable sources is to be ensured
by 2020, among others through offshore wind and
solar power. The recent announcements of the new government would imply a
reversal of the former government's decision in 2010 to allow new nuclear
reactors to replace old ones. The government announced however already in
October 2014 that it will invite to discussions with the opposition and set up
a dedicated energy commission to reach an energy agreement with cross-party
support, sustainable in the longer term. The work of the announced energy
commission is expected to start in 2015. A future agreement across parties is
expected to give medium- to long-term certainty for investors as well and
operators in the energy field. The uncertainties surrounding the future of
nuclear energy in Sweden has however already led the state owned electricity
utility Vattenfall to put on hold its plans for new nuclear reactors. Given the
importance of nuclear energy in the current electricity mix, a phase-out would
lead to significant challenges to ensure generation adequacy through other
energy sources.
 Graph 3.3.5:   Share of renewables in gross final energy consumption, 2012 and Europe 2020 target 
   
 Source: European Commission 
Increased investments and continued
attention is needed to improve the functioning of the Swedish rail system, which to a sizeable extent (representing roughly 60% of the railway
sector turnover) is governed by state-owned enterprises (to be compared with
83% on average in the EU) (Graph 3.3.6). The overall situation of the
transport infrastructure network is not unsatisfactory. At the same time,
analysis shows that traffic volumes have outpaced investments over the last
decade. ([66]) The level
of investment in the maintenance and upgrading of the Swedish rail system
continues to be an area with limited progress, also in view of the severe
weather conditions. In order to reduce delays and eliminate remaining
bottlenecks (especially in urban areas, but affecting the entire network),
particularly on cross-border rail traffic with continental Europe, investments
are needed. The intensive use of the existing network results in recurring
delays and problems have intensified over the latest decade. ([67]) According to recent estimates, railway investments need to
continue to increase - at least at the same pace as GDP growth - to accommodate
increased traffic levels. Ineffective connections risk negatively impacting
foreign trade and the labour market. In December 2014, the government added
additional instructions to the on-going inquiry regarding the organisation of
the Swedish railway system, with the purpose of reviewing how the state can
improve its coordination of rail maintenance. 
 Graph 3.3.6:   Share of SOEs turnover in total, railway 2012 
   
 Source: European Commission 
Given its geographical situation, all
transport modes are important for the future of Swedish export, and potential capacity bottlenecks need careful consideration. In
this context, maritime transport continues to be a strong alternative as
a transport mode in its own right and as an essential part of the intermodal
chain. In 2013, the government adopted an action plan for improved
competitiveness of the Swedish shipping industry. It was meant to be followed
by a new maritime strategy in 2014. The strategy is, however, still forthcoming
and concrete measures are yet to be implemented. In this context, analysis
shows that unlike most other EU/EEA Member States, Sweden has so far not
introduced measures (in particular a so called tonnage tax system) to
counteract the flagging out of Swedish vessels. The recent conclusions of a
public inquiry commissioned by the government nevertheless expressed support
for introducing tonnage tax in Sweden. ([68]) The EU Member States that have introduced
a tonnage tax have experienced strong fleet growth over the last decade,
whereas the Swedish fleet has remained relatively flat or, recently, even
negative (Graph 3.3.7). Given that the world fleet has also
grown strongly over the last ten years, this means that the Swedish flagged
share of the world fleet has fallen from 1.1% in 1980, to just 0.1% in
2012. ([69]).
 Graph 3.3.7:   Evolution of the flagged fleets of some EU Member States, 2004-13 (% change in deadweight tonnage 
 Source: Oxford Economics, UNCTAD 
 Commitments || Summary assessment ([70]) 
 2014 Country specific recommendations (CSRs) 
 CSR 1: Continue to pursue a growth-friendly fiscal policy and preserve a sound fiscal position, ensuring that the medium-term budgetary objective is adhered to throughout the period covered by the Convergence Programme, also with a view to the challenges posed on the long-term sustainability of public finances by an ageing population.   || Sweden has made some progress in addressing CSR 1 of the Council recommendation (this overall assessment of CSR1 excludes an assessment of compliance with the Stability and Growth Pact): Limited progress in further enhancing the efficiency of public spending on long-term care linked to an ageing population. 
 CSR 2: Moderate household sector credit growth and private indebtedness. To this end, reduce the effects of the debt bias in personal income taxation by gradually limiting tax deductibility of interest payments on mortgages and/or by increasing recurrent property taxes. Take further measures to increase the pace of amortisation of mortgages.   || Sweden has made limited progress in addressing CSR 2 of the Council recommendation: No progress in reviewing the taxation of relevance to housing, i.e. the mortgage interest deductibility rules and property taxation. Some progress in promoting an amortisation culture, with the Financial Supervisory Authority announcing new rules regarding amortisation down to 50% for new mortgage loans. The measure remains to be fully defined and implemented. 
 CSR 3: Further improve the efficiency of the housing market through continued reforms of the rent-setting system. In particular, allow more market-oriented rent levels by moving away from the utility value system and further liberalising certain segments of the rental market, and greater freedom of contract between individual tenants and landlords. Decrease the length and complexity of the planning and appeal processes, by reducing and merging administrative requirements, harmonising building requirements and standards across municipalities and increasing transparency for land allotment procedures. Encourage municipalities to make their own land available for new housing developments.   || Sweden has made limited progress in addressing CSR 3 of the Council recommendation: No progress in reviewing the rent-setting system or the freedom of contract on the rental market. Limited progress in rendering the zoning and planning processes more efficient. The full effect of some previously adopted measures (for example regarding a review of noise rules, amended procedures regarding appeals etc) is still to be seen and the rules regarding letting of private dwellings have been eased (although they are now to be reviewed by the new government). In addition, as from July 2014, homeowners may build a supplementary dwelling house on their plot of land without the need for a building licence. Limited progress regarding municipalities' incentives. A public inquiry has been set up to investigate regulations governing land use and planning and also propose measures that increase municipal planning for housing and the supply of land. 
 CSR 4: Take appropriate measures to improve basic skills and facilitate the transition from education to the labour market, including through a wider use of work-based training and apprenticeships. Reinforce efforts to target labour market and education measures more effectively towards low-educated young people and people with a migrant background. Increase early intervention and outreach to young people who are unregistered with the public services.     || Sweden has made some progress in addressing CSR 4 of the Council recommendation: Limited progress in taking measures to improve basic skills. Teaching hours in mathematics have been increased. The Institute for School Research started work on 1 January 2015 to strengthen the evidence-base of education reforms. An independent School Commission is still to be established to propose long-term school reforms and national goals. Some progress in facilitating the transition from education to the labour market, e.g. through the introduction of an upper secondary apprentice employment contract. Some take-up issues still remain to be addressed. Some progress on fully implementing the Youth Guarantee for persons not in employment, education or training (NEETs), but not yet ensuring that all categories of young people benefit from the national guarantee. A new youth policy framework includes continued efforts to develop activities for NEETs. Adequate coordination at local level still remains to be ensured. Limited progress in targeting labour market and education measures more effectively to the vulnerable groups. A set of new measures targeted towards newly arrived migrants was adopted in June 2014, which serves to tighten benefit conditions for migrants. A comprehensive proposal regarding the education of newly arrived students was announced and expected to enter into force on 1 January 2016. The Education Act was amended in July 2014 to oblige municipalities to consider socio-economic factors when allocating school resources. 
 Europe 2020 (national targets and progress) 
 Employment rate target set in the 2014 NRP: well over 80%. || Employment rate (%) in 2012: 79.4%, 2013 79.8% The EU wide target was met already before the crisis in 2007-08. Achievement of a more ambitious national target was hindered by the 2008-09 crisis. Since then progress has picked up and Swedish labour market performance remains solid. 
 R&D target set in the 2013 NRP: 4% of GDP by 2020. || Gross domestic expenditure on R&D (in % of GDP): 3.28% in 2012 and 3.21% in 2013 (provisional). No progress towards the target. Although public R&D intensity has grown yearly by 2.5% over the 2007-12 period, private expenditure on R&D as % of GDP has decreased by 1.4% per year over the same period. Sweden may still reach its R&D target for 2020 if the new policy of challenge-based innovation achieves to stimulate the development of high growth innovative enterprises and thus leverage R&D private investments. 
 Greenhouse gas emissions, base year 1990: -17 % (compared to 2005 emissions; emissions under the EU Emissions Trading Scheme (ETS) are not covered by this national target). || According to the latest projections and taking into account existing measures, the target is expected to be achieved: -19% in 2020 compared to 2005 (with a margin of 2 percentage points). Change in non-ETS greenhouse gas emissions between 2005 and 2013: -20% (preliminary data). 
 Renewable energy target set in the 2013 NRP: Renewable energy target: 49 % Share of renewable energy in the transport sector: 10 % || Share of renewable energy in gross final energy consumption 51.7% in 2013. Sweden has already reached its 2020 target for renewable energy of 49%. 
 Energy efficiency: Energy efficiency target: 20% reduction in energy intensity (vs. 2008) By 2020: level of 43.4 Mtoe primary consumption and 30.3 Mtoe final energy consumption || Energy intensity of the economy Although primary and final energy consumption have been decreasing in 2005-12, this trend has been reversed in the more recent years (2011-12), for both primary and final energy consumption. In addition, Sweden is not on track in meeting its national energy target for both final and primary energy consumption. 49.8 Mtoe primary energy consumption and 32.4 Mtoe final energy consumption in 2012 according to ESTAT.. 
 Early school leaving target: 10% || Early leavers from education and training (Share of the population aged 18-24 with at most lower secondary education and not in further education or training) in 2012: 7.5%, 2013: 7.1%. The target has been achieved. Sweden also has other national definitions of early school leaving, see chapter 4.2. 
 Tertiary education target: 40-45% || Tertiary educational attainment (share of population 30-34 having successfully completed tertiary education): in 2012: 47.9%, 2013: 48.3%. The target has been achieved. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: Reducing to well under 14 % the number of people aged 20-64 who are not in the labour force (except full-time students), long-term unemployed or on long-term sick leave. || People at-risk-of-poverty or social exclusion in 1 000 persons attainment in 2012: 13.1%, 2013: 12.7%. According to the 2014 national reform programme the proportion of the population covered by the target is estimated to be about 12.7% of the age group (2013), which would suggest that the target has been reached. 
 Table B.1:       Macroeconomic indicators 
 1 The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices.         2 The indicator of domestic demand includes stocks.         3 Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.         Source: European Commission 2015 winter forecast; Commission calculations 
 Table B.2:       Financial market indicators 
 1) Latest data November 2014. 2) Latest data Q2 2014. Four large banking groups.      3) Latest data Q3 2014. Four large banking groups.      4) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included.      * Measured in basis points.      Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators). 
 Table B.3:       Taxation indicators 
 1. Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation.      2. This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.      3. VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends.      Source: European Commission 
 Table B.4:       Labour market and social indicators 
 1 Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.       2 Long-term unemployed are persons who have been unemployed for at least 12 months.       Source: European Commission (EU Labour Force Survey and European National Accounts) 
 Table B.5:       Expenditure on social protection benefits (% of GDP) 
 1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).      2 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income.       3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone.      4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.      5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes)      6 2014 data refer to the average of the first three quarters.      Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table B.6:       Product market performance and policy indicators 
 1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.       2 Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting.        3 The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology.        4 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       5 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators) 
 Table B.7:       Green growth 
 Country-specific notes:         2013 is not included in the table due to lack of data.        General explanation of the table items:        All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)                  Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)                  Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)                  Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                  Waste intensity: waste (in kg) divided by GDP (in EUR)        Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP          Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP        Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)        Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’        Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)         Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP        Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.        Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste        Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP        Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency         Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)        Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector        Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels        Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin        Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents        * European Commission and European Environment Agency        ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.        *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2. Source: European Commission unless indicated otherwise; European Commission elaborations indicated above 
([1])  Although Sweden's banking system had
the third largest consolidated exposure to Russia among EU countries (after the
Netherlands and France), this has been reduced significantly, from 2.7% of
Sweden's GDP in December 2012 (when Sweden had the highest exposure among EU
countries to Russia) to 1.6% of GDP by June 2014. Overall Swedish banks'
exposure to Russia is around mere 0.4% of total bank assets.
([2])  European Commission: Macroeconomic
Imbalances Sweden 2014. Occasional Papers 186, March 2014.
([3])  Winstrand, Jakob and Ölcer, Dilan
(2014), How indebted are the Swedish households?, Economic Commentary
no. 1, 2014. Sveriges Riksbank.
([4])  Financial Supervisory Authority, The
Swedish Mortgage Market 2014, 2014.
([5])  The method was developed by C. Cuerpo,
Drumond, I., Lendvai, J., Pontuch, P., and Raciborski, R. (2014), Private
sector deleveraging in Europe, Economic Modelling. 
([6])  Bornhorst, F. and M. Ruiz-Arranz
(2013), Indebtedness and Deleveraging in the euro area, 2013 Article IV
Consultation on euro area policies: Selected Issues Paper, Chapter 3, IMF
Country Report 13/232.
([7])  For more details regarding the
sustainability analysis for Sweden, see IDR
Macroeconomic imbalances - Sweden 2014, European
Economy, Occasional Papers 186, March 2014.
([8])  FSA memorandum 2014-11-11.
([9])  For Denmark, according to current
legislation, the value of the deduction on mortgage interest payment will be
reduced from 33½% to 25½% by 2019. For Finland, the deductible fraction of
mortgage interest against positive capital income is 75% in 2014 (from 85% in
2012), and due to further decrease to 65% in tax year 2015. The deduction is
also capped at € 1 400 per taxpayer, plus € 400 for one child and € 800
for two or more children. For the Netherlands, interest payments on loans for
the purchase of owner-occupied dwellings taken out as of 1 January 2013 can be
deducted only if they are fully repaid in the form of a linear or an annuity
mortgage within a maximum of 30 years. Moreover, the maximum rate at which
mortgage interest payments can be deducted from taxable labour income is being
reduced by 0.5 points each year over a 28-year-period, from 51.5% to 38% by
2031.
([10]) Swedish Construction Federation:
ByggKonjunkturen of 22 October 2014 and 10 December 2014. 
([11]) Boverket: Låst läge på bostadsmarknaden. Market
report, May 2014.
([12]) IMF: Staff Report for the 2013 Article IV consultation, 2013 or
Finansinspektionen: The Swedish Mortgage Market 2013, 7 March 2013.
([13]) Sveriges Riksbank: How indebted are
Swedish households? By Jakob Winstrand and Dilan Ölcer, 7 May 2014.
([14]) Assuming the same amount of monthly
interest payments, households can take a 20% higher mortgage loan if they opt
for non-amortisation at mortgage interest rates of 6%. If mortgage interest
rates fall to 3%, the available loan could increase by 66% and in case mortgage
interest rates fall to 2%, they double.  See also
Johansson, S. Hegelund, E. and Karpestam, P.: Amorteringars effekter på
bostadspriser och konsumtion. Rekommendationer för en europeisk marknad i
förändring. Sieps, October 2014. 
([15]) European Commission: Tax Reforms in EU Member 2014 - Tax policy
challenges for economic growth and fiscal sustainability, June 2014.
([16]) Boverket: Bostadsbristen ur ett marknadsperspektiv, Rapport 2012:18.
([17]) Swedish Competition Authority: Competition
in Sweden 2013. Rapport 2013:10.
([18]) County Administrative Board: Outnyttjade detaljplaner för bostäder
Lägesbild i 13 av länets kommuner i mars 2014, March 2014.
([19]) Swedish Competition Authority:
Competition in Sweden. Rapport 2013:10.
([20]) Swedish Government Offices: Better
competition for increased housing. Dir 2014:75.
([21]) Boverket: Bostadsbristen och hyressättningssystemet - ett
kunskapsunderlag, Market report, November 2013.
([22]) Cuerpo Caballero, C., Demertzis, M.,
Fernández Vilaseca, L., Pontuch, P., Assessing the dynamics of house prices in
the euro area, Quarterly Report of the Euro Area, 4/2012.
([23]) Boverket: Bostadsbristen och hyressättningssystemet - ett
kunskapsunderlag, Market report, November 2013.
([24]) Financial Supervisory Authority (2014)
Stability in the financial system, 10 December 2014.
([25]) The Basel III Net Stable Funding Ratio
(NSFR) seeks to calculate the proportion of long-term
assets which are funded by long term, stable funding. Detailed features of the
NSFR are still being calibrated: an EU consultation was
launched in January 2014. The 100% minimum will be binding
by 2019.
([26]) The Basel III Liquidity Coverage Ratio
(LCR) requires banks to hold liquid assets sufficient to cover cash outflows
over a 30 day period. The minimum coverage is 100%. The Basel III / CRD4 foreseen
enforcement deadline for the EU Member States is 2015.
([27]) Financial Supervisory Authority:
Memorandum, 21/05/2013 and Swedish Mortgage Market 2014, 2014
([28]) Sveriges Riksbank (2011): The Riksbank's
inquiry into the risks in the Swedish housing market
([29]) Riksbank (2014), Financial Stability
Report, 2014:2
([30]) Sverige Riksbank, Financial
Stability Report, 2014:1
([31]) Winstrand, Jakob and Ölcer, Dilan
(2014), How indebted are the Swedish households?, Economic Commentary
no. 1, 2014. Sveriges Riksbank.
([32]) In its report, Den Svenska Skulden,
the Center for Business and Policy Studies proposes to render mortgage loans
more robust for the future by introducing some risk sharing mechanisms between
the lenders and the borrowers in case of price drops. It is also proposed to
reintroduce data collection on wealth, which was dropped in 2007, to better
trace the distribution of assets.
([33]) Flodén Martin (2014), Did household
debt matter in the great recession?; Dynan, Karen (2012), Is household
debt overhang holding back consumption? Brookings Papers on Economic
Activity; Mian, Atif, Kamelesh Rao and Amir Sufi (2013), Household
balance sheets, consumption and the economic slump, Quarterly Journal of
Economics 128(4)
([34]) Nordic Regional Report (2013),
IMF Country Report No. 13/275
([35]) The Swedish Economy (August
2014), The National Institute of Economics Research
([36]) Multi-Country Report (2015), IMF
Country Report No. 15/1
([37]) Financial Supervisory Authority, The
Swedish Mortgage Market 2014
([38]) Alsterlind et al (2013), Risks to
the macroeconomy and financial stability from the development of household debt
and housing prices. Riksbank's analysis uses real consumption statistics
whereas the Financial Supervisory Authority uses an average of banks'
subsistence costs estimates.
([39]) "Invandringen och de offentliga finanserna", Rapport till
expertgruppen för studier i offentlig ekonomi, Swedish Ministry of Finance,
2009.
([40]) "Ny befolkningsprognos påverkar sysselsättning och produktion på
lång sikt", Swedish National Institute of Economic Research, June 2014.
([41]) SOU 2013:38, May 2013. The final
report from parliamentary committee evaluating compliance was presented in
October 2013 (SOU 2013:73). 
([42]) Increase by 6.7 pp. since 2007. Further
details available in Žáková (2013), Sun spots on the Swedish labour market?,
ECFIN Country Focus. 1 May 2013.
([43]) EU Labour Force Survey, 2012.
([44]) Skolverket (2012) Gymnasial lärlingsutbildning de tre första åren
2008–2011. Deltagande, elevernas erfarenheter och studieresultat. Rapport 373.
([45]) OECD International Migration Outlook 2014 table 2.1 page 68.
([46]) National Institute of Economic Research (2014),
"Lönebildningsrapporten 2014" and IMF 2014 Article IV Consultation –
Staff report.
([47]) The wage premium of permanent workers
was found to be almost 45%, while in the majority of countries; the premium was
around 20 -25 per cent. (Boeri, T. (2011) “Institutional Reforms and Dualism in
European Labor Markets”, in Card, D. and O. Ashenfelter (eds.) Handbook of
Labor Economics, Vol 4b.)
([48]) OECD's Survey of Adult Skills : http://www.oecd.org/site/piaac/surveyofadultskills.htm
([49]) "Do payroll tax cuts raise youth
employment?" by Egebark and Kaunitz, The Institute for Evaluation of
Labour Market and Education Policies (IFAU), 2013.
([50]) SOU 2012:69 The right to participate.
Recently arrived women and family member immigrants in the labour market.
Stockholm: Ministry of Labour.
([51]) OECD (2014): Resource, Policies and
Practices in Sweden’s Schooling System: an in-depth analysis of PISA 2012
results.
([52]) http://www.oecd.org/edu/school/talis.htm.
([53]) Skolverket (2013): An Assessment of the
Situation in the Swedish School System. 
([54]) Skolinspektionen (2009) Utbildning för Nyanlända Elever. Rätten till
en God Utbildning i en Trygg Miljö. Stockholm: Skolinspektionen and Bunar, N.
(2010) Nyanlända och Lärande. Stockholm: Vetenskapsrådet.
([55]) OECD (2014): Shifting Responsibilities
- 20 Years of Education Devolution in Sweden: A Governing Complex Education
Systems Case Study, Education Working Papers, No. 104.
([56]) IFAU (2014): Sweden’s school choice
reform and equality of opportunity, Working paper 2014:16.
([57]) Riksrevisionen (2014): Specialdestinerade statsbidrag – Ett sätt att
styra mot en mer likvärdig skola? (RiR 2014:25) http://www.riksrevisionen.se/PageFiles/20896/RiR_2014_25_Statsbidrag%20skolan_anpassad.pdf
([58]) OECD Income inequality data update:
Sweden (January 2015).
([59]) The at-risk-of-poverty rate is the
proportion of people with an equivalised disposable income (after social
transfer) below the at-risk-of-poverty threshold, which is set at 60 % of the
national median equivalised disposable income after social transfers. This
indicator does not measure wealth or poverty, but low income in comparison to
other residents in that country, which does not necessarily imply a low standard of
living.
([60]) The at-risk-of-poverty rate was 12.7%
in 2007, and after a peak in 2011 (24.7%), relative poverty decreased somewhat
by 2013 (to 22.3%), mainly due to an increase of the housing allowance and some
tax cuts for pensioners.
([61]) Employment and Social Development in
Europe Review 2013, Chapter 3: The gender impact of the crisis and the gap in
total hours worked and OECD, 2012, Closing the Gender Gap.
([62]) "Enkla regler, svåra tider – behöver stabiliseringspolitiken
förändras?", SNS Konjunkturråds rapport 2012.
([63]) As regards the five main drivers of the
digital economy, Sweden ranks 1st out of 28 Member States on use of
internet services, 2nd on both human capital and integration of
digital technologies, 3rd on connectivity and 5th on digital
public services. Source: "Digital Economy and Society Index"
developed by the European Commission.
([64]) 2013 SMEs’ Access to Finance Survey,
Analytical Report, European Commission, 14/11/2013.
([65]) "Helping Firms Grow",
European Competitiveness Report 2014, European Commission.
([66]) "Nivån på
infrastrukturinvesteringarna i Sverige", National Institute of Economic
Research, March 2012.
([67]) ”Situationen i det svenska
järnvägsnätet”, TRV2011/10161A, Swedish Transport Administration, 2011.
([68]) SOU 2015:4 "Ett svenskt
tonnageskattesystem", Ministry of Finance, February 2015.
([69]) Study by Oxford Economics 'The Economic
Value of the EU Shipping Industry', 2014.
([70]) The following categories are used to
assess progress in implementing the 2014 CSRs of the Council Recommendation: No
progress: The Member State has neither announced nor adopted any measures
to address the CSR. This category also applies if a Member State has
commissioned a study group to evaluate possible measures. Limited progress:
The Member State has announced some measures to address the CSR, but these
measures appear insufficient and/or their adoption/implementation is at risk. Some
progress: The Member State has announced or adopted measures to address the
CSR. These measures are promising, but not all of them have been implemented
yet and implementation is not certain in all cases. Substantial progress:
The Member State has adopted measures, most of which have been implemented.
These measures go a long way in addressing the CSR. Fully addressed: The
Member State has adopted and implemented measures that address the CSR appropriately.